T. N. Pandey

T. N. Pandey discusses the CAG's recent report on DTAAs

THE Comptroller & Auditor General of India (CAG) in its Report No. 13 of 2005, placed in both the Houses of Parliament, reveals a number of deficiencies in India's tax treaties with various countries in the context of income-tax assessments of non-residents (NRs).

The importance of such treaties has been growing because of rising foreign investments (both direct and portfolio investments), which jumped to $16.052 billion in 2003-04 compared to a mere $103 million in 1990-91. Tax treaties in the context of such investments play an important role.

The CAG has reviewed some aspects of the administration and implementation of double taxation avoidance agreements (DTAAs) with select countries in the context of taxation of NRs, maritime business and other issues such as mutual agreement procedure exchange of information and assistance in tax collections. Such scrutiny has not put the tax administration in favourable light. What follows are some major deficiencies as pointed out in the Report.

A comparative study of 12 DTAAs (with the US, the UK, Japan, Germany, Kenya, Mauritius, Malaysia, Oman, South Africa, Singapore, the UAE and Uzbekistan) reveals that there was no consistency in defining the existence of a permanent establishment (PE) based on the minimum threshold period of existence.

Expenditure incurred by the PE towards royalty and fee for technical services consequently became an allowable expenditure, thereby reducing the taxable income leading to loss of revenue. However, the audit could not quantify loss of revenue on this score, as the field offices of the department did not have any specific mechanism or procedure designed to watch and prevent the same.

Examination in the audit revealed that while in the case of DTAAs with Russia and Morocco, payment for transfer of computer software was treated as `royalty', in the case of other DTAAs, especially the one with the US, there is no such specific mention of the same.

For assessment years 1999-2000 to 2003-04, the audit examined assessments of 10 companies coming under the DIT (IT), Bangalore, to which the Indo-US DTAA applied. The assessees had preferred an appeal against the assessments, which sought to tax the payments for computer software as `royalty', on the ground that the DTAA did not clearly specify whether that payment should be categorised as royalty.

The aggregate tax demand involved in these 10 cases was Rs 54.78 crore, which could have been realised if the Indo-US DTAA had contained specific provisions as in other DTAAs or an amendment to the DTAA that safeguarded the interests of the Revenue.

One of the reasons for entering into DTAAs is to assist in the recovery of taxes under the respective statutes of the contracting states. While specific provisions exist in DTAAs with South Africa, Belgium and Denmark, these are conspicuous by their absence in DTAAs concluded with the US, the UK and Singapore. Thus, demands aggregating Rs 2.68 crore relating to three assessees belonging to the US and Singapore could not be enforced.

Audit scrutiny of the Indo-Belgium DTAA revealed that if India limits its taxation on royalties or fees for technical services to a lower rate in the DTAA with a third state, which is a member of the OECD, then the benefit of such limitation/rate would automatically apply to the Indo-Belgium DTAA. Similar provision exists in the DTAAs with the Netherlands and France.

The CAG noticed that similar or corresponding privilege/benefit is not automatically available to India from the OECD countries. With the prospect of entry of new countries into the OECD, the Government will have to take care in negotiating the tax rates, as these will have multilateral implications affecting the existing DTAAs with the OECD countries.

The audit noticed that benefit of exemption on capital gains tax of Rs 8.40 crore under the Indo-Mauritius DTAA was allowed subsequent to issue of the Board's circular of April 2000, even when it was established ab initio that the effective place of management was in third countries.

DTAAs lay down a mutual agreement procedure (MAP) for resolving disputes arising out of their application.

The taxpayer may approach the competent authority of the contracting state of which he is a resident, where he feels that the assessment order passed is not in accordance with the terms of the DTAA.

The competent authority shall endeavour to resolve the dispute by mutual agreement with the competent authority of the other country. MAP is an additional mechanism for settling tax disputes and shall be given effect to notwithstanding any time limits under the domestic law of the contracting states. Test check of MAP cases revealed that there was inadequate co-ordination between the Board and the assessing officers resulting in appellate authorities taking contrary views on resolutions arrived at by competent authorities.

Further, the audit has also pointed out delays in settling cases under MAP. Thirteen cases were pending resolution for periods ranging from two to five years resulting in Rs 425.42 crore of revenues being blocked. Besides these, various mistakes in making assessments in the case of NRs have also been pointed out in the Report. Test check of the application of the provisions in the taxation of NRs revealed that tax was short-levied to the extent of Rs 109.48 crore on various counts in 28 cases.

The CAG review on the working of the DTAAs and assessments in the case of non-residents shows that these are not taken seriously, leading to under-utilisation of the DTAAs, especially in the context of information exchange to check tax evasion and garnering revenues.

There is a need to review the existing DTAAs to bring these in line with rapid advancement in information technology and help the Indian tax authorities to check tax evasion, especially rampant in international deals.

It is time the neglected areas pointed out in the audit report are attended to quickly for checking revenue loss.

(The author is a former chairman of the CBDT.)

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