By Ashwin Mohan, CNBC-TV18

Last week the taxman is believed to have sent a notice to foreign institutional investors, or FIIs, saying that henceforth their income from P-Notes would be taxable. Now, CNBC-TV18 learns that one FII has responded to the notice.

According to sources familiar with the matter, a leading FII is believed to have filed its initial response to the Income Tax department.

The response is believed to contain the following points: Since they are coming in through a bilateral treaty between two nations i.e. India and Mauritius, the taxman needs to recognise and respect that. Secondly, if the party has substantial operations in the country i.e India and possesses a tax residency certificate, then it is entitled to tax treaty benefits based on the landmark "Azadi Bachao Andolan" ruling of the Supreme Court in 2003.

It is believed that other FIIs will follow a similar route.

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