The Madras High Court has today issued an order dismissing petitions challenging the constitutionality of Section 94-A (1), of the Income Tax Act and against a notifying Cyprus as a jurisdictional area. The Court ruling comes as a major set back for Foreign Institutional Investors (FII) and uphol;ds the government's decision to tax inflows at 30 per cent TDS from Cyprus.
The Madras High Court said that Section 94A is the need of the hour and there was nothing unconstitutional about it.
According to market sources, between 2000 and 2014 Cyprus accounted for Rs 38,300 crore of inflows in India and in Indian stock markets.
Pramod Kumar Chopda, standing counsel for the Ministry of Finance, Central Board of Direct Taxes and IT Department confirmed the Order and said this is a major step towards controlling black money, which the Centre Government is working towards.
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The Order was passed by a bench consisting of Justice V Ramasubramanian and Justice T Mathivanan today.
The Court said it is in the considered view that the challenges to Section 94-A (1), and the notification dated November 1, 2013 notifying Cyprus as notified jurisdictional area is not sustainable in law.
The Order further stated that "the ordinary dictionary meaning of the word "haven" is "harbour or anchorage". By extension, the word also denotes a place of safety, a refuge or sanctuary. In association with the word "tax", the word "haven" has assumed different connotations in the recent past and Panama appears to have followed Cyprus.
"Therefore, Section 94A was the need of the hour and we do not find the same to suffer from unconstitutionality. Hence, all the writ petitions are dismissed," said in the Order.
As per section 94A, the Central Government may, having regard to the lack of effective exchange of information with any country or territory outside India, specify the said country or territory as a notified jurisdictional area in relation to transactions entered into by any assesse.
India and Cyprus has entered into an agreement for avoidance of double taxation of income and prevention of fiscal evasion which is in force since 21st December, 1994. Both the Contracting States under this agreement have a legal obligation to exchange such information as is necessary for carrying out the provisions of the agreement or of domestic laws of the Contracting States, in particular for the prevention of fraud or evasion of taxes, said a press release issued by the Ministry of Finance on November 1, 2013..
The press release further stated that since Cyprus has not been providing the information requested by the Indian tax authorities under the exchange of information provisions of the Agreement, it has been decided to notify Cyprus as a notified jurisdictional area under Section 94-A of the Income-tax Act, 1961.
Three individuals, T Rajkumar, K Dhanakumar and T K Dhanashekar challenged the constitutional validity of the Section, the validity of Finance Ministry's notification on November 1, 2013 in exercise of the powers under the Act, specifying Cyprus as a notified jurisdictional area for the purposes of Section 94-A(1) and the validity of a press release dated November 1, 2013 issued by the Ministry of Finance.
According to the copy of the order, a tripartite Agreement dated October 2014 was entered into by and between an Indian company by name New Kovai Real Estate Private Limited, a company incorporated in the country of and under the laws of Cyprus by name Skyngelor Limited and the three individuals who has . By the said Agreement, the Cyprus company, which was holding about 15,200 equity shares of the face value of Rs 10 each and about 21,39,200 compulsorily convertible debentures of the face value of Rs 100 in Kovai Real Estate Private Limited, agreed and undertook to sell all those shares and debentures to the writ petitioners
After three months of the execution of the aforesaid Securities Purchase Agreement, the petitioners received show-cause notices in January 2015, inviting their attention to Section 94-A(1) of the Income Tax Act, 1961 and the Notification No.86/2013 dated November 1, 2013 and calling upon them to explain why each one of them should not be treated as an assessee.
