Month: May

1. Interpretation of Double Taxation Avoidance Agreements :

The principles set out in Vienna Convention as agreed on 23rd May, 1969 are recognised as applicable to tax treaties. Rules embodied in Articles 31, 32 and 33 of the Convention are often referred to in interpretation of tax treaties.S Some aspects of those Articles are good faith; objects and purpose and intent to enter into the treaty. Discussion papers are referred to resolve ambiguity or obscurity. These basic principles need to be kept in mind while construing DTAA .

1.1. Maxwell on the Interpretation of Statutes mentions the following rule, under the title ‘presumption against violation of international law’: “Under the general presumption that the legislature does not intend to exceed its jurisdiction, every statute is interpreted, so far as its language permits, so as not to be inconsistent with the comity of nations or the established rules of international law, and the court will avoid a construction which would give rise to such inconsistency, unless compelled to adopt it by plain and unambiguous language. But if the language of the statute is clear, it must be followed notwithstanding the conflict between municipal and international law which results”.

2.2. In John N. Gladden vs. Her Majesty the Queen, the Federal Court observed:”Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.” The Federal Court in N. Gladden vs. Her Majesty the Queen 85 D.T.C. 5188 said : “”The non-resident can benefit from the exemption regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the U.S. were to abolish capital gains completely, while the other country did not, a resident of the country which had abolished capital gains would still be exempt from capital gains in the other country.”

1.3. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions.

1.4. The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.

1.5. The Supreme Court in Vodafone International Holdings B.V. vs. Union of India (2012) 341-ITR-1 (SC) observed: “The court has to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope and cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability. It also reiterated and declared “All tax planning is not illegal or illegitimate or impermissible”. McDowell ‘s case has been explained and watered down.

1.6. Tax treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage vis-a-vis other taxpayers. Section 90(2) of the Income-tax Act lays down that in relation to the assessee to whom an agreement u/s. 90(1) applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 789 dated April 13, 2000 (2000) 243-ITR-(St.) 57 has been declared as valid in Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 ) SC) at 101. The Supreme Court in C.I.T. vs. P.V.A.L. Lulandagan Chettiar (2004) 267-ITR-657 (SC) has held : “In the case of a conflict between the provisions of this Act and an Agreement for Avoidance of Double Taxation between the Government and a foreign State, the provisions of the Agreement would prevail over those of the Act.

1.7. The Jaipur Bench of I.T.A.T. (TM) in Modern Threads Case 69-ITD-115 (TM) relying on the Circular dated 2.4.1982 held that the terms of DTAA prevail. It also observed: “The tax benefits are provided in the DTAA as an incentive for mutual benefits. The provisions of the DTAA are, therefore, required to be construed so as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon’ble Supreme Court in the case Bajaj Tempo Ltd. vs. CIT 196-ITR-188 and CIT vs. Shan Finance Pvt. Ltd. 231-ITR-308”. The Bangalore Bench in IBM World Trade Corp. vs. DIT (2012) 148 TTJ 496 held that the provisions of the Act or treaty whichever is beneficial are applicable to the assessee.

2. Explanation :

The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause. If the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. If there is conflict in opinion on the construction of a provision, the Legislature steps in by inserting the Explanation, to clarify its intent. Explanation is normally clarificatory and retrospective in operation. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly.

2.1. The orthodox function of an Explanation is to explain the meaning and effect of the main provision. It is different in nature from a proviso, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. An Explanation is also different from rules framed under an Act. Rules are for effective implementation of the Act whereas an Explanation only explains the provisions of the section. Rules cannot go beyond or against the provisions of the Act as they are framed under the Act and if there is any contradiction, the Act will prevail over the Rules. This is not the position vis-à-vis the section and its Explanation. The latter, by its very name, is intended to explain the provisions of the section, hence, there can be no contradiction. A section has to be understood and read hand in hand with the Explanation, which is only to support the main provision, like an example does not explain any situation, held in N. Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

2.2. Ordinarily, an Explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may possibly arise from the existing provisions. Normally, therefore, an Explanation would not expand the scope of the main provision and the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit as held in Katira Construction Ltd. vs. Union of India (2013) 352-ITR-513 (Gujarat).

3. Proviso :

A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing by way of an addition to the main provision which is foreign to the principal provision itself. Indeed, in some cases, a proviso may be an exception to the main provision though it cannot be inconsistent with what is expressed thereinand, if it is, it would be ultra vires the main provision and liable to be struck down. As a general rule, in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justifying its necessity.

3.1. A proviso to a provision in a statute has several functions and while interpreting a provision of the statue, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without the proviso and if the same is found to be ambiguous only then recourse maybe had to examine the proviso. On the other hand, an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially.

3.2. A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. “Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context” (Thompson vs. Dibdin, 1912 AC 533). The rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause. To expand the enacting clause, inflated by the proviso, is a sin against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction” as observed in: Union of India & Others vs. Dileep Kumar Singh (2015) AIR 1421 at 1426-27.

4. Retrospective or Prospective or Retroactive :
It is a well-settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute, so as to take away or impair an existing right, or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in several decisions of the Supreme Court as well as English courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.

4.1. In Hitendra Vishnu Thakur vs. State of Maharashtra, AIR 1994 S.C. 2623, the Supreme Court held: (i) A statute which affects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature; (iii) Every litigant has a vested right in substantive law, but no such right exists in procedural law. (iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished. (v) A statute which not only changes the procedure but also creates new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. This principle stands approved by the Constitution Bench in the case of Shyam Sunder vs. Ram Kumar AIR 2001 S.C. 2472.

4.2. It has been consistently held by the Supreme Court in CIT vs. Varas International P. Ltd. (2006) 283-ITR-484 (SC) and recently, that for an amendment of a statute to be construed as being retrospective, the amended provision itself should indicate either in terms or by necessary implication that it is to operate retrospectively. Of the various rules providing guidance as to how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock, that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips vs. Eyre3, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated, when introduced for the first time to deal with future acts, ought not to change the character of past transactions carried on upon the faith of the then existing laws as observed in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 486.

4.3. If a legislation confers a benefit on some persons, but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators’ object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In the Government of India & Ors. vs. Indian Tobacco Association, (2005) 7-SCC-396, the doctrine of fairness was held to be a relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay vs. State of Maharashtra (2006) 6-SCC-289. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. Refer CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 487. In my view, in such circumstances, it would have a retroactive effect.

4.4. In the case of CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42-ITR-589 (SC), the court held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year, i.e., the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax.

4.5. There are three concepts: (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; (iii) clarificatory amendments which are retrospective in nature; and (iv) an amendment made to a taxing statute can be said to be intended to remove “hardships” only of the assessee, not of the Department. In ultimate analysis in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 496-497 (SC), surcharge was held to be prospective and not retrospective.

4.6. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubt as the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act, which was already implicit. A clarificatory amendment of this nature will have retrospective effect. It is called as retroactive.

5 May or Shall :
The use of the word “shall” in a statutory provision, though generally taken in a mandsssatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. The setting in which the word “may” has been used needs consideration, and has to be given due weightage.

5.1. When a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case, when a party interested and having a right to apply moves in that behalf and circumstances for exercise of authority are shown to exist. Even if the words used in the Statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right – public or private – of a citizen. When a duty is cast on the authority, that power to ensure that injustice to the assessee or to the revenue may be avoided must be exercised. It is implicit in the nature of the power and its entrustment to the authority invested with quasi-judicial functions. That power is not discretionary and the Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise power conferred as held by the Supreme Court in L. Hirday Narain vs. I.T.O. (1970) 78 I.T.R. 26.

5.2. Use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used which would justify a departure from this meaning. Where an assessee seeks to claim the benefit under a statutory scheme, he is bound to comply strictly with the conditions under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to a tax payer. The provisions contained in an Act are required to be interpreted, keeping in view the well recognised rule of construction that procedural prescriptions are meant for doing substantial justice. If violation of the procedural provision does not result in denial of fair hearing or causes prejudice to the parties, the same has to be treated as directory notwithstanding the use of word ‘shall’, as observed in Shivjee Singh vs. Nagendra Tiwary AIR 2010 S.C. 2261 at 2263.

5.3. In certain circumstances, the word ‘may’ has to be read as ‘shall’ because an authority charged with the task of enforcing the statute needs to decide the consequences that the Legislature intended to follow from failure to implement the requirement. Hence, the interpretation of the two words would always depend on the context and setting in which they are used.

6. Mandatory or Directory :

It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and others vs. Filip Tiago De Gama of Vedem Vasco De Gama, (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336). In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom. In E. Palanisamy vs. Palanisamy (Dead) by Lrs. And others, (2003) 1 SCC 122), a Division Bench of the Supreme Court observed: “The rent legislation is normally intended for the benefit of the tenants. At the same time, it is well settled that the benefits conferred on the tenants through the relevant statutes can be enjoyed only on the basis of strict compliance with the statutory provisions. Equitable consideration has no place in such matter.”

6.1. The Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case, the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statue or read something into it which is not there. It cannot rewrite or recast legislation. It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used, the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.

7. Stare Decisis :

To give law a finality and to maintain consistency, the principle of stare decisis is applied. It is a sound principle of law to follow a view which is operating for a long time. Interpretation of a provision rendered years back and accepted and acted upon should not be easily departed from. While reconsidering decisions rendered a long time back, the courts cannot ignore the harm that is likely to happen by unsettling the law that has been settled. Interpretation given to a provision by several High Courts without dissent and uniformly followed; several transactions entered into based upon the said exposition of the law; the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora’s box of uncertainty.

7.1. The Supreme Court referring to Muktul vs. Manbhari, AIR 1958 SC 918; and relying upon the observations of the Apex Court in Mishri Lal vs. Dhirendra Nath (1999) 4 SCC 11, observed in Union of India vs. Azadi Bachao Andolan (2003) 263 ITR at 726: “A decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view.”

8. Subject to and Non-obstante :
It is fairly common in tax laws to use the expression ‘Notwithstanding anything contained in this Act or Other Acts” or “Subject to other provisions of this Act or Other Acts”. The principles governing any non obstante clause are well established. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “Notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non-obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

8.1 The Apex court in Union of India vs. Kokil (G.M.) AIR 1984 SC 1022 stated : “It is well known that a non -obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.” In Chandavarkar Sita Ratna Rao vs. Ashalata S. Guram, AIR 1987 SC 117, it observed : “A clause beginning with the expression ‘notwithstanding anything contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract’ is more often than not appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non obstante clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned in the enactment following it will have its full operation, or that the provisions embraced in the non-obstante clause would not be an impediment for an operation of the enactment. The above principles were again reiterated in Parayankandiyal Eravath Kanapravan Kalliani amma vs. K. Devi AIR 1996 SC 1963 and are well settled.

8.2 The distinction between the expression “subject to other provisions’ and the expression “notwithstanding anything contained in other provisions of the Act” was explained by a Constitution Bench of the Supreme Court in South India Corporation (P.) Ltd. vs. Secretary, Board of Revenue (1964) 15 STC 74. About the former expression, the court said while considering article 372: “The expression ‘subject to’ conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.” About the non obstante clause with which article 278 began, the court said : “The phrase ‘notwithstanding anything in the Constitution’ is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278.”

To be continued in the next issue.

In India, the term FFI,
would generally include banks, nonbank finance companies, housing
finance companies, depository participants (custodians), insurance
companies and similar institutions. In order to make FAT CA reporting
possible in the IGA Model 1 framework, the Government of India needed to
have a policy decision that India would participate in the information
exchange programme, a legal framework to authorise collection of such
financial information, an agency to administer the exchange of
information requirements. Work on some of these areas started in 2013
and significant steps have been taken till end of March 2015. Additional
steps are being taken to strengthen the information exchange programme.

India – policy decision
One of the first decision
points was whether India would participate in the FAT CA initiative
launched by the US. After examining possible consequences for the Indian
financial sector if India remains away and in light of India’s
commitment to global financial transparency, the Government of India
decided that it would enter into an IGA. As negotiation of tax treaties
and exchange of information was generally handled by the Ministry of
Finance (MoF), it was decided that the MoF would be the nodal agency for
FATCA and other similar financial information exchange initiatives.
From the second half of 2013 to early 2014, the MoF officials worked
with regulators in the Indian financial sector to determine what should
be the broad agreement with the US IRS. The principal regulators
involved in the consultation were the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI) and the Insurance
Regulatory & Development Authority (IRDA). Based on this
consultation, an agreement ‘in substance’ was entered into in April
2014. One crucial administrative detail that remained was the formal
approval by the Union Cabinet supporting the signing of the final IGA.
This was scheduled for March 2014 but ultimately was obtained in March
2015.

Regulations
Before the IGA in substance was
entered into, one of the key questions before the Indian Government, the
regulators and before the FFIs was whether there was any regulatory
support for FFIs to send financial information in respect of their
clients to the US IRS directly. One school of thought was that Article
28(1) and 28(2) of the India-US Double Tax Avoidance (DTAA ) allowed the
exchange of information subject to the limitations under Article 28(3) –
for ease of reference, all three are reproduced below – at Government
to Government level but FFIs could not directly report to the US IRS.

1.
The competent authorities of the Contracting State shall exchange such
information (including documents) as is necessary for carrying out the
provisions of this Convention or of the domestic laws of the Contracting
States concerning taxes covered by the Convention insofar as the
taxation thereunder is not contrary to the Convention, in particular,
for the prevention of fraud or evasion, of such taxes. The exchange of
information is not restricted by Article 1 (General Scope). Any
information received by a Contracting State shall be treated as secret
in the same manner as information obtained under the domestic laws of
that State. However, if the information is originally regarded as secret
in the transmitting State, it shall be disclosed only to persons or
authorities (including Courts and administrative bodies) involved in the
assessment, collection, or administration of, the enforcement or
prosecution in respect of or the determination of appeals in relation
to, the taxes which are the subject of the Convention. Such persons or
authorities shall use the information only for such purposes, but may
disclose the information in public Court proceedings or in judicial
decisions. The competent authorities shall, through consultation,
develop appropriate conditions, methods and techniques concerning the
matters in respect of which such exchange of information shall be made,
including, where appropriate, exchange of information regarding tax
avoidance.

2. The exchange of information or documents shall be
either on a routine basis or on request with reference to particular
cases, or otherwise. The competent authorities of the Contracting States
shall agree from time to time on the list of information or documents
which shall be furnished on a routine basis.

3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :

(a)
to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
(b)
to supply information which is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting
State;
(c) to supply information which would disclose any trade,
business, industrial, commercial, or professional secret or trade
process, or information the disclosure of which would be country to
public policy (ordre public).

The regulators, however, believed
that the statutes did not generally empower them to ask for financial
information of the type envisaged under FAT CA and that an amendment of
the statute was necessary. The Finance (No. 2) Act, 2015 amended the
Income-tax Act, 1961 by substituting new section 285BA for the earlier
section with effect from 1st April, 2015. This amendment also provides
for registration with the Government of India, of any reporting
institution, a provision that was absent in the old section 285BA.

Registration
Although
an FFI may be operating in an IGA Model 1 country like India and will
report through its host country Government, it is still required to
obtain the Global Intermediary Identification Number (GIIN) as an FFI.
Although India entered into an IGA in substance in early April 2014,
Indian regulators did not give the green signal to apply for GIIN in
April 2015 i.e. the cut-off date for getting the GIIN by June before the
FAT CA implementation date of 1st July, 2014. FFIs having multi-country
operations e.g. State Bank of India, however, applied for and obtained
GIIN in the first list. FFIs operating in India were treated as being
FAT CA compliant till 31st December, 2014 in terms of the IGA in
substance. On 30th December, 2014, both RBI and SEBI directed FFIs to
apply for and obtain GIIN by 1st January, 2015. The IRDA issued similar
instructions a little later. The stage was set for FFIs in India to
obtain GIIN.

Regulations

In  late  2014,  the  mof  circulated  to  a  limited  group, the  draft  version  3  of  the  proposed  rules  for  CRS  and fatCa for comments by stakeholders. in early 2015, the draft version 5 was similarly circulated for comments. the suggestions that have come in are currently under evaluation  on  the  MOF  side.  It  is  understood  that  a reporting entity will obtain, apart from the 20-character GIIN   under   FATCA,   a   16-character   indian   reporting entity identification number. This will be in addition to any Permanent account number (PAN) that the entity may have but will capture the PAN (or TAN) as part of the 16-characters. this requirement is broadly similar to that in the UK, where FATCA implementation under model 1 IGA has progressed further. The FFI will have to file separate reports in respect of different activities e.g. a bank maintaining bank accounts and also providing demat accounts will report the information for bank accounts separately from that relating to custody accounts. the nature of the reporting requirements and complications will also necessitate issuance of detailed guidance by the MOF.

Meanings of specific terms
Certain   terms   have   been   defined   under   the  draft regulations.  Some  of  the  important  ones  are  briefly discussed here.

A financial institution (hereinafter referred to as ‘fi’) is defined to mean a custodial institution, a depository institution, an investment entity or a specified insurance company.  the terms ‘custodial institution’ and ‘depository institution’ are not directly defined. We have to derive  the meaning indirectly from usage in the definition of ‘financial account’.

A ‘financial account’ means an account (other than an excluded account) maintained by an FI and includes (i) a depository account; (ii) a custodial account (iii) in the case of an investment entity, any equity or debt interest in the FI; (iv) any equity or debit interest in an FI if such interest in the institution is set up to avoid reporting under (iii); and
(v) cash value insurance contract or an annuity contract (subject to certain exceptions).

For  this  purpose,  a  ‘depository  account’  includes  any commercial, savings, time or thrift account or an account that is evidenced by certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness or other similar instrument maintained by a FI in the ordinary course of banking or similar business. It also includes an account maintained by an insurance company pursuant to a guaranteed investment contract. In ordinary parlance, a ‘depository account’ relates to a normal bank account plus certificates of deposit (CDs), recurring deposits, etc. A ‘custodial account’ means an account, other than an insurance contract or an annuity contract, or the benefit of another person that holds one or more financial assets. In normal parlance, this would largely refer to demat accounts.  The national Securities depository Ltd. (NSDL) statement showing all of their investments listed at one place will give the readership an idea of what a ‘custodial account’ entails. These definitions are at slight variance with the commonly understood meaning of these terms in india.

the term ‘equity interest’ in an FI means,
(a)    in the case of a partnership, share in the capital or share in the profits of the partnership; and
(b)    in the case of a trust, any interest held by
–    Any person treated as a settlor or beneficiary of all or any portion of the trust; and
–    any other natural person exercising effective control over the trust.

For this purpose, it is immaterial whether the beneficiary has the direct or the indirect right to receive under a mandatory distribution or a discretionary distribution from the trust.

An ‘insurance contract’ means a  contract,  other  than an annuity contract, under which the issuer of the insurance contract agrees to pay an amount on the occurrence of a specified contingency involving mortality, morbidity, accident, liability or property. an insurance contract, therefore, includes both assurance contracts and insurance contracts. an ‘annuity contract’ means a contract under which the issuer of the contract agrees   to make a periodic payment where such is either wholly or in part linked to the life expectancy of one or more individuals. a ‘cash value insurance contract’ means an insurance contract that has a cash value but does not include indemnity reinsurance contracts entered into between two insurance companies. in this context, the cash value of an insurance contract means

(a)    Surrender value or the termination value of the contract without deducting any surrender or termination charges and before deduction of any outstanding loan against the policy; or
(b)    The amount that the policy holder can borrow against the policy

whichever is less.   the cash value will not include any amount payable on death of the life assured, refund of excess premiums, refund of premium (except in case    of annuity contracts), payment on account of injury or sickness in the case of insurance (as opposed to life assurance) contracts

An ‘excluded account’ means
(i)    A retirement or pension account where
•    The account is subject to regulation as a personal retirement account;
•    The account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
•    Information reporting is required to the income-tax authorities with respect to such account;
•    Withdrawals are conditional upon reaching a specified retirement age, disability, death or penalties are applicable for withdrawals before such events;
•    The contributions to the account are limited to either $ 50,000 per annum or to $ one million through lifetime.

(ii)    An account which satisfies the following requirements viz.
•    The account is subject to regulations as a savings vehicle for purposes other than retirement or the account (other than a uS reportable account) is subject to regulations as an investment vehicle for purposes other than for retirement and is regularly traded on an established securities market;
•    The account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
•    Withdrawals are conditional upon specific criteria (educational or medical benefits)  or  penalties  are applicable for withdrawals before such criteria are met;
•    The contributions to the account are limited to either $ 50,000 per annum or to $ one million through lifetime.

(iii)    An account under the Senior Citizens Savings Scheme 2004;

(iv)    A life insurance contract that will end before the insured reaches the age of 90 years (subject to certain conditions to be satisfied);

(v)    An account held by the estate of a deceased, if the documentation for the account includes a copy of the will of the deceased or a copy of the deceased’s death certificate;

(vi)    An account established in connection with any of the following

•    A court order or judgment;
•    A sale, exchange or lease of real or personal property, if the account is for the extent of down payment, earnest money, deposit to secure the obligation under the transaction, etc.
•        An FI’s obligation towards current or future taxes in respect of real property offered to secure any loan granted by the FI;

(vii)    In the case of an account other than a US reportable account, the account exists solely because a customer overpays on a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer. Up to 31st december, 2015, there is a cap of $ 50,000 applicable for such overpayment.

Before any analysis of these definitions can be done in the India context, it is important  to note  the definition  of ‘non-reporting financial institution’. A ‘non-reporting financial institution’ means any FI that is, –

(a)    A Government entity, an international organisation or a central bank except where the fi has depository, custodial, specified insurance as part of its commercial activity;
(b)    Retirement funds of the Government, international organisation, central bank at (a) above;
(c)    A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;
(d)    An entity which is indian fi solely because of its direct equity or debt interest in the (a) to (c) above;
(e)    A qualified credit card issuer;
(f)    A FI that renders investment advice, manages portfolios for and acts on behalf or executes trades on behalf a customer for such purposes in the name of the customer with a fi other than a non- participating fi;
(g)    An exempt collective investment vehicle;
(h)    A trust set up under indian law to the extent that the trustee is a reporting fi and reports all information required to be reported in respect of financial accounts under the trust;
(i)    An FI with a local client base or with low value accounts or a local bank;
(j)    In case of any US reportable account, a controlled foreign corporation or sponsored investment entity or sponsored closely held investment vehicle.

An FI with a local client base is one that does not have  a place of business outside india and which also does not solicit customers or account holders outside india. It should not operate a website that indicates its offer of services to uS persons or to persons resident outside india. The test of residency to be applied here is that of tax residency.  The term ‘local bank’ will include cooperative credit societies. In this case also offering of account to US persons or to persons resident outside india, will be treated as a bar to being characterised as a local bank.

Due Diligence
The draft regulations provide for three categories of due diligence exercise in respect of client documentation under  FATCA for accounts of US persons viz.

(i)    new account due diligence (NADD);
(ii)    Pre-existing account due diligence (PADD)

•    For high value accounts i.e. where the balance is in excess of $ one million as at 30th june, 2014 or as at 31st december of any subsequent year;

•    For low value accounts i.e. where the balance is in excess of $ 50,000 but does not exceed US$ one  million  as  at  30th  june,  2014  or  as  at  31st december of any subsequent year.

The  methodology  of  the  due  diligence  differs  for  these although the documentation requirements are broadly similar. For NADD, the residency certificate issued by the authorities overseas forms the primary evidence of tax residency. For Padd, the address on record should be treated as being the indicator of the tax residency. If the FI does not rely on current mailing address, it must do an electronic search of its records for identification   of tax residency outside india, or a place of birth in the US, or a current mailing or residence address (including post office box) outside India, or one or more telephone numbers outside india and no telephone number in india, or standing instructions to transfer funds to an account maintained in a jurisdiction outside india, or power of attorney given to a person outside india, or ‘hold mail’ or ‘care of’ address outside india. all of these indicia may be overridden by specific declarations from the customer. The FI will not be entitled to rely on the customer’s self- declaration, if the fi knows or has reason to know that the self-certification or documentation is incorrect. An example of this is where an account holder who is ostensibly a resident of india informs the fi’s representative that he (the account holder) is uS ‘green card’ holder and has to  visit  the  US  to  retain  his  green  card   this  is  a  case where the fi has to ignore the local address in india and treat the account holder s being a US person. For high value accounts, enhanced due diligence is required to be done through the relationship manager meeting with the customer. Where any indicia show the account holder to be resident of more than one jurisdiction, the FI should treat the customer as being resident of each of the jurisdictions i.e. the FI shall not apply tie breaker tests.   The  Padd  exercise  must  be  completed  by  30th june, 2015 for US reportable accounts and by 30th jun, 2016 for other accounts.  For US reportable accounts, an FI is not required to do Padd (but may elect to do so) in respect of accounts where the depository account or the cash value of the insurance contract is up to $ 50,000 as at 31st december, 2014.  For entity accounts (as opposed to individual accounts), the threshold cut off is $ 250,000 but the measurement date is 30th june, 20141.  Once an account is identified as a US reportable account, it shall be continued to be treated in such a manner unless the indicia are appropriately cured at a later stage.

Reporting Deadlines
The draft regulations provide for reporting deadline of 31st july, 2015 for reporting to be done in respect for 2014 and as 31st may in later years.  This reporting is, in terms of the model 1 IGA, to be done through the MOF.

Next Steps and Conclusion
The  next  steps,  from  the  side  of  the  Government,  are signing of the IGA, issuance of the final regulations, notifying the data structure and setting up the infrastructure for receiving the reports. For the industry, the work has already begun with nadd and Padd. interim work on development of reporting systems is in progress but the UAT stages are held up for want of the final data structure from the Government side. Over the next few years, the fis will invest a lot of time and capital in the preparedness for financial transparency in respect of customer accounts in line with the expectations of the G20 nations, as we move beyond FATCA to the OECD’s Common reporting Standards (CRS).