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The Indian Supreme Court has admitted appeals against a Madras High Court's ruling that upheld the constitutionality of section 94A of the Income Tax Act, an anti-avoidance provision used by the Government to notify Cyprus as a non-cooperative tax jurisdiction in 2013.
The ruling under appeal was delivered by the Madras High Court on April 12, where it held that there was nothing in the Indian Constitution to prevent the Parliament from either enacting section 94A or issuing a notification under that section classifying Cyprus as a "notified jurisdictional area."
Section 94A empowers the Government to blacklist any foreign country if it fails to effectively exchange information in tax matters with India. In November 2013, the Government notified Cyprus under that section after it failed to exchange information requested by the Indian tax authorities.
The dispute in the case began after three Indian residents received notices from the tax authority asking them to show cause as to why proceedings should not be launched against them for failing to deduct or pay tax at source at the time of remitting payment to a Cypriot company under a Securities Purchase Agreement.
The individuals had unsuccessfully argued before the Madras High Court that section 94A is unconstitutional in that it is contrary to the India/Cyprus tax treaty. They had also contended that the Government cannot take recourse to domestic law when the treaty itself restricts exchange of information in certain cases and that all treaty disputes must be settled through the mutual agreement procedure framework set out in the treaty.
Admitting the appeals on May 13, 2016, the Supreme Court ordered the Government to respond as to why section 94A and the notification issued under that section should not be set aside. The court also ordered that no recovery will be made in the meantime.
The next hearing in the case has been listed for July 5.
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