Shivakantjha.org - Triplet 21 - International public law and decisions of revenue authorities in domestic jurisdiction
Triplet 21
International public law and decisions of revenue authorities in domestic jurisdiction
By Shiva Kant Jha
August 21, 2009
I intend to examine in this leaf the legality of certain foreign administrative acts in India. This topic is of great importance in this phase of globalization. The world now consists of a vast number of states; many of them are clearly rogues. What sort of attitude we should hold towards their administrative acts done in their territories but having effects in our territory? If an act of foreign government per se is accepted in our country there may be disastrous consequences. If this is recognized on the principle of comity, or under any other norms of international law, it may be possible for a government on an atoll to depredate a sub-continent (which virtually our country is) by virtue of its pretence of being a sovereign State. This subject would be examined in with reference to the Certificate of Residence issued by the foreign governments.
It is well settled that under international law, foreign administrative acts done in the public law field are not to be given effect. Oppenheim correctly observes:
“There is probably no international judicial authority in support of the proposition that recognition of foreign official acts is affirmatively prescribed by international law.”[ Section 112; also Michael Akehurst “Jurisdiction in International Law” The British Year Book of International Law 1972-73 pp. 145, 245-250.]
Norms of comity do not apply in revenue law
It is wrong to say that under the norms of international comity the administrative acts of the foreign governments (one such an instance is the Certificate of Residence) are to be given effect. The norms of international comity are mere acts of courtesy analogous to the norms of international morality. “The [the rules of international law] are legally binding, while the latter [the norms of international comity] are for the most part rules of goodwill and civility, founded on moral right of each state to receive courtesy from others.” [J.G. Starke, Introduction to International Law 10th ed. p.20 ]. . Starke refers to two leading cases which show that the norms of ‘international comity' do not apply in revenue matters, and in matters relating to the control of drugs (at p. 21):
“‘Comity', in its general sense, cannot, however, be invoked to prevent the United Kingdom, as a sovereign state, from taking steps to protect its own revenue laws from gross abuse; see decision of the House of Lords in Colleco Dealing Ltd v. IRC [ [1961] 1 All ER 762 at 765].. Likewise, a charge of conspiracy to commit offence of importing dangerous drugs into the United Kingdom, based on an alleged agreement made outside British jurisdiction, is not in violation of ‘international comity' [ DPP v. Doot [1973] AC 807 at 834-835]..
And in Collco Dealings Ltd v. IRC [1961] 1 All ER 762 at 765 Viscount Simonds observed in the context of the Double Taxation Avoidance Agreement:
“But I would answer that neither comity nor rule of international law can be invoked to prevent a sovereign state from taking steps to protect its own revenue laws from gross abuse or save its own citizens from unjust discrimination in favour of foreigners.”
In Trendtex Trading Corpn v Central Bank [1977] 1 All ER 881 at 894 the Court of Appeal of the United Kingdom was evaluating a Certificate granted by the ambassador of Nigeria stating that a particular organization was a department of State. Under public international law he represented the Sovereign State of Nigeria in the United Kingdom. Lord Denning observed in the said judgment:
“I confess that I can think of no satisfactory test except that of looking to the functions and control of the organization . I do not think that it should depend on the foreign law alone. I would look to all the evidence to see whether the organization was under government control and exercised governmental functions. That is the way is which we looked at it in Mellenger v New Brunswick Development Corpn ….” [Italics supplied]
In the context of the Certificate of Residence granted by the Mauritian authorities it can be said that the Indian tax authorities were well within their jurisdiction to examine the operative of facts from the observation-post of the Indian tax law to see the real profile of facts. They had to appraise the issue in the light of correct legal principles.
In the cases of the treaty shoppers the Certificate of Residence creates an opaque smokescreen which facilitates the commission of fraud. Jurisprudence of every civilized country condemns fraud. . Our Supreme Court in Shrisht Dhawan v. Shaw Brothers. (AIR 1992 SC 1555 at 1564, para-20) observed:
“Fraud and collusion vitiate even the most solemn proceedings in any civilized system of jurisprudence.”
It is well settled that even the judgments of the superior courts in foreign jurisdictions can be ignored if they are contrary to public policy. [Israel Discount Bank of New York V. Hadjipateras[ [1983] 3 ALL ER 129]; Smith v. East Elloe Rural District Council [ [1956] AC 736]. In Owens Bank Ltd. v. Bracco [ [1992] 2 All ER 193 HL]; Abouloff v. Oppenheimer & Co [(1982) 10 QBD 295, [1881-5] All ER Rep 307].. In Abouloff, Lord Coleridge CJ concludes his judgment by saying [(10 QBD 295 at 303, [1881-5 ] All ER 307 at 310)]:
‘I think, therefore, on the broad ground that no man can take advantage of his own wrong, and that it is a principle of law that no action can be maintained on the judgment of a court either in this country or in any other, which has been obtained by the fraud of the person seeking to enforce it, that the defence is good…'
The above propositions stand illustrated in the decision of the House of Lords in Government of India v Taylor (27 ITR 356) wherein the House of Lords rejected our government's case for the following two reasons:
(a) in no circumstances will the Courts of a country directly or indirectly enforce the revenue laws of another country and therefore no State can sue in a foreign country for taxes due under the law of that State;
(b) a claim for foreign taxes is not a liability, which the liquidators of a company in liquidation are bound to discharge.
Under the International Law of Nationality
The propositions, which the House of Lords laid down, in that case are the established propositions of public international law, which every lawyer is supposed to know. It nauseates a citizen to know how carefree our government was in not recovering tax dues whilst the assessee was in India. Forty years gone; our Government has not cared to incorporate recovery mechanism in most of the tax treaties. Even the corporate status granted in a foreign jurisdiction may not be recognized without scrutiny. In the Nottebohm' Case the International Court of Justice determined the principles governing “nationality” in these words:
“… a legal bond having as its basis a social fact of attachment, a genuine connection of existence and sentiments, together with the existence of reciprocal rights and duties. It may be said to constitute a juridical expression of the fact that the individual upon whom it is conferred, either directly by the law or as a result of an act of the authorities, is in fact more closely connected with the population of the State conferring nationality than with that of any other State.”
Oppenheim's seminal observations are worth quoting [from his International Law 9th ed. PEACE]: “The Court found that there was no bond of attachment between Nottebohm and Liechtenstein , and that there was a long-standing and close connection between him and Guatemala , a link which his naturalization in Liechtenstein in no way weakened; that naturalization had been ‘granted without regard to the concept of nationality adopted in international law'. Accordingly the Court held that Guatemala was under no obligation to recognize Nottebohm's Liechtenstein nationality, and that Liechtenstein could not institute proceedings against Guatemala in respect of damage suffered by him.” “…. However, this power of investigation is one which is only to be exercised if the doubts cast on the alleged nationality are not only not manifestly groundless but are also of such gravity as to cause serious doubts with regard to the truth and reality of that nationality.” “…Furthermore, it is not only international tribunals which may question the grant of nationality by a state to an individual. Even the national courts of other states may, although usually reluctant to do so, in certain circumstances feel it right to inquire into the justification and lawfulness of a state's grant of its nationality. This is likely to be the case where the grant of nationality is questioned because of alleged non-conformity with international law.”
II
Implications of Incorporation
A Corporation is a created juristic person for business purpose . Law ascribes collective and limited liability to a group of persons conceived and contrived as a jural entity. Incorporation is the formation of a legal corporation. “ Prima facie , the nationality of a corporation or limited company is that of the state of incorporation, and this test is also adopted by some treaties.” It simply means that it is a juristic person capable of certain rights and duties for the promotion of certain objects for which it is created. The certificate of incorporation is virtually its birth certificate. Tedeschi rightly points out:
“In this era of increased corporate mobility, the choice of the place of incorporation may be purely a matter of convenience without any intention on the part of those who manifest the corporate will to have any other connection with the jurisdiction of incorporation.” [M. Tedeschi, “The Determination of Corporate Nationality” The Australian Law Journal Vol. 50 p. 561.]
A Corporation cannot be an impervious cover-let of gross abuse
A corporation evolved as a form of business organization in which public interest was greatly interested as its enterprise generated huge amount of wealth. It was not conceived as an impervious coverlet for abuse. This point has been clearly brought out by an eminent author in these words:
“Before dealing with exceptional situations in which the veil is lifted, it should be emphasized that the veil never means that the affairs of the company are completely concealed from view. On the contrary, the legislature has always made it an essential condition of the recognition of corporate personality with limited liability that it should be accompanied by wide publicity. Although third parties dealing with the company will normally have no right to resort against its members, they are nevertheless entitled to see who those members are, what shares they hold and, in the case of a listed company, the beneficial interests in those shares if substantial. They are also entitled to see who its officers are (so that they know with whom to deal), what its constitution is (so that they know what the company may do and how it may do it), and what its capital is and how it has been obtained (so that they know whether to trust it). And unless it is an unlimited company they are also entitled to see its accounts or at least a modified version of them—again in order to know whether to trust it.”[Gower's Principles of Modern Company Law pp. 148-49].
It is clear from the above that transparency is not excluded by “incorporation”. It is a matter of public policy that the affairs of a company should be under public gaze so that the form of business organization devised, with the best of commercial interests, is not used for extraneous purposes. Under the very grammar of its existence it must remain under public scrutiny. But, as is evident from the realities of the economic globalization, every effort is being made to evade scrutiny:
(a) by the whole corporate imperium as its constituents have a lot of skeletons in their cupboards which they want always to keep shrouded in secrecy;
(b) by the big players under the present global architecture, like the IMF, World Bank and the WTO, which provide models of secrecy, lack of public accountability, and absence of democratic character;
(c) by the tax havens and many other states having an opaque system to get enriched with the ill-gotten wealth of others;
(d) by all those who believe that illegal wealth and illicit power can flourish most when opaqueness is ensured.
Public Policy and Corporate Personality
In R v. Registrar General, ex parte Smith it was held that Public Policy would enable an authority even to ignore a mandatory legal provision if compliance with that would promote some criminal activity, whether already taken place or apprehended to take place. The expression “eye of equity” is an expanding metaphor. Transparency and the eye of equity can ensure justice in this global world where opaqueness and lack of public accountability are the most disturbing facts. In the 1986 decision of the Bundesfinanzhof in German jurisdiction the doctrine of the abuse of legal form has been recognized [Philip Baker in Double Taxation Conventions and International Law 2nd ED. p. 101]. Klaus Vogel has outlined the judicial perspective in these words:
“If the form of a transaction is not recognized for tax purposes under domestic law or under treaty law, the tax consequences which the tax payer sought to obtain through structuring the transaction in question will not occur and tax authorities will then apply those tax rules which would have applied according to the appropriate legal form of transaction…” [ Klaus Vo gel on Double Taxation Conventions at pp. 41-42].
The Multinational Corporations argue for an impregnable corporate shell so that how these really operate is not under known to public. The tax havens, and those who sail in the common boat, think that it is not for them to see whether certain companies are managed by criminals, or whether they draw their fund from the tainted earnings from the most unscrupulous sources (amassed through bribery, receipt of kick-backs, drug-trafficking, insider-trading, embezzlement, computer fraud, under invoicing-over invoicing, and other sordid and morbid activities spawning scams having deep lethal consequences on the welfare of common people). Re R.G. Films Ltd. states general principles universally recognized. Dias in his Jurisprudence draws general juristic principles in these words:
“Public policy may make it necessary to look at the realities behind the corporate façade…Courts are always vigilant to prevent fraud or evasion. Thus, they will not permit the evasion of statutory obligations.”
Development of jurisprudence is from the analytical to the functional is illustrated by the judicial approaches in the two leading cases, one decided by the House of Lords ( Furniss v. Dawson ) [[1984] 1 All ER 530] and the other decided by the U.S Supreme Court ( Knetsch v. United States) [364 US 361 (1960)] . The House of Lords ignored the existence of that tax haven company by circling out transactions effected through it without negating its corporate personality. As there was no economic impact of this transposed entity its relevance was not recognized in determining effect for the purposes of the tax laws . The U.S Supreme Court shows that even legitimate corporation may engage in transactions lacking economic substance; and so the Commissioner could disregard transactions between related legitimate corporations. This functional approach has been adopted in various other European jurisdictions. Corporate personality, which incorporation brings about, is designed to operate only within its permissible province..
A corporation was evolved as a form of business organization in which public interest was greatly involved. Our Supreme Court too held in a series of decisions that a corporation was not conceived as an impervious coverlet [AIR 1986 SC, 1370; Commr. of Income-tax v. Meenakshi Mills; Workmen v. Associated Rubber Industry ; New Horizons Ltd. v. Union of India [1995] 1 SCC 478”; AIR 1969 SC 932 ; State of UP v. Renusagar Power Company [1988] 4 SCC 59. . ]
Over the recent years the ground realities of our global economy have undergone radical change. Corporations have been the greatest beneficiaries of the innovations in the trading strategy, and have helped the system of international finance to in become greatly creative. . Alvin Toffler gives a graphic account of the operative facts of the corporations in our present-day economic globalization in his Power Shift [pp. 454-455]:
“Just as nations are proving inept in coping with terrorists or religious frenzy, they are also finding it harder to regulate global corporations capable of transferring operations, funds, pollution, and people across borders. … Under the new system for creating wealth, with companies from several countries linked into global “alliances” and “constellations,” it is harder to determine corporate nationality………. With cross-national takeovers, mergers, and acquisitions on the rise, ownership of a firm could, in principal, switch from one country to another overnight. Corporations are thus becoming more truly non-national or transnational, drawing their capital and management elites from many different nations, creating jobs and distributing their streams of profits to stockholders in many countries.”
Under the circumstances of our times the easiest of all ways to respond to the present challenges posed by the instruments of darkness is to use the judicially created doctrine of the Lifting of the Corporate Veil, to discover the operative facts to see whether someone is playing ducks and drakes with law.
III
Story of Two Frogs: Plight of our 'low arousal people'
A society, which keeps on quietly accepting aberrations & injustice over a long span of time, is surely most unfortunate. The massive strokes of injustice suddenly inflicted leads to powerful reaction with all its instant spiral effect. But when it comes in low doges the victims keep on adjusting with it treating their plight as mere vagaries of misfortune. This sort of process of adjustment is sure to destroy the capacity to rise to higher levels of excellence. We cannot enjoy sojourn on a plateau: if we cannot go up, we must decline. This is what history has taught us, and while making history we can ill- afford to forget it. This brings to my mind a story about two frogs which a naughty boy had caught for his sinister play. He hurled one into a pan of boiling water. The frog jetted into the boiling water but instantly jumped out and fell with a thud in a bush, and so it survived. The second frog was initially lucky because it enjoyed the cool water. But the boy played the cruel prank. He set fire wood ablaze under the pan in which the frog rested with delight. The water which was cool and comfortable was made warmer & warmer. There was a phase in which the frog found warmth to its liking. It was followed by other phases when it found warmth becoming inconvenient and inclement. It went on adjusting with the circumstances under which it was placed. But water became hot, and then it became extremely hot. The unlucky frog had fritted away its energy in the process of adjusting itself with the circumstances becoming more & more inconvenient. By now it had reached a point where it could do only one thing; it could die. The story of the two frogs is rich in lesson it underscores the hazards of adjustments. It illustrates the wisdom of what lord Krishna said “we are our own foes, we are our own friends”. The story of two frogs is designed to jolt our low arousal people to action so that the wielders of political power show vigilance and responsibility in matters, which concern the common people of the Republic. It is a powerful metaphor that must not be forgotten. Daniel Quinn in the Story of B . (1996) explores this metaphor to illustrate certain ironies of history. As all public power is trust, we must keep it under constant scrutiny and continuous revaluation. An expert has perceptively observed how the story of two frogs has been understood in recent times: “ The story has been retold many times and used to illustrate many different points. It has been used to warn about diverse phenomenon, for example: in 1960 about sympathy towards the Soviet Union during the Cold War, in 1980 about the impending collapse of civilization anticipated by survivalists, and in the 1990s about inaction in response to climate change and staying in abusive relationship. It has also been used by libertarians to warn about slow erosion of civil rights.” The history of the two World Wars shows what disasters the policies of appeasement and adjustment can cause. We can forget such lessons only at our peril.
When we look back we notice numerous instances illustrating the Story of the Two Frogs. In this leaf I would refer to a few of them:
(i) The tragedy that was wrought at Kurukshetra (as portrayed in the Mahabharat ) could have been avoided if persons like Bhishma, Drone, and Kripacharya would have refused to keep on adjusting with Duryodhana, and despite reluctance appeasing him by not opposing him and Dhritarastra.
(ii) The history of the medieval India is a gruesome example how a great nation refused to face a socio-political crisis by withdrawing in the world of Bhakti. The Hindu society took shelter and repose in the religious thoughts because it ceased to have creative verve to challenge the foreign invaders. The degradation of our society was slow, even furtive. Our religion virtually became the opium of the society. The creative path of action, which the Gita had taught, stood forgotten.
(iii) The Slave's syndrome is also an apt example. The point suggested in the Story of Two Frogs is most tellingly brought out in what has come to be known as ‘the slave's syndrome' under which a freed slave puts on shackles as his ornaments as he is yet to learn (or has forgotten) what freedom means, and how it is preserved. Antigone in Antogone (by Sophocles) says in profoundly pregnant words:
ANTIG. Speak out! I bid thee. Silent, thou wilt be
More hateful to me than if thou shouldst tell
My deed to all men.
(iv) The story of the two frogs helps us understand the phenomenon of the Pax Mercatus of the present-day economic globalization, “When Corporations Rule the World”( the name of a wonderful book by David C. Korten). His chapter on ‘Rise of Corporate Power' deserves to be read and re-read. The corporate charters were granted as far back the 16 th century conferring certain privileges to the groups of persons so that the public good resulting from enterprises abroad might not suffer on account of the psychosis that if the enterprise resulted in loss that would subject the entrepreneurs to ruinous debts and liabilities. Over the years what happened is thus summarized by Korten:
“……the history of corporate-government relations since that day has been one of continuing pressure by corporate interests to expand corporate rights and limit corporate obligations”.
The political supervision and control went on declining in the 19 th century. The U.S. Supreme Court also helped the corporations in a series of cases. The view made by Karl Marx that judiciary helped the vested interests had come true. After the U.S. Civil War, the corporate power waxed, and the control of the political authorities waned. This morbid state of affairs led President Abraham Lincoln to observe with pathos (quoted by Korten at p.58):
“Corporations have been enthroned. . . . An era of corruption in high places with follow and the money power will endeavor to prolong its reign by working on the prejudices of the people. . . until wealth is aggregated in a few hands. . . and the Republic is destroyed.”
Through pressure, persuasion, gratification, the corporate interests succeeded in subjugating the political real of the State to the economic realm ruled by the corporations. It is interesting to study how the non-human institutions acquired human rights, and how with its vast wealth turned even the watchers of polity a set of purchasable commodities. What Lincoln had said came come true.
(v) The metaphor is wholly apt to explain the plight of the common suffering Indians. I have called the present model of economic growth ‘the ‘Taj Mahal Economy'. I had written about it in the Legal Potpourri of July 24, 2009 . There are good reasons to believe that religion, media, intellectuals, and all the organs of the State seem to work just to keep the temperature low so that the humans (frogs) remain deluded till they are caught in the stupor to keep on suffering till they are boiled to death. And the beneficiaries of the unjust system tell the tongue-tied sufferers (to say in the words of Ramdhari Singh ‘Dinkar' in his epic Kurukshetra) :
‘Do not disturb whilst I sip blood from your heart,
Let the reign of peace prevail whilst you live for us to bask.
They are supposed to “ keep their tongue between their teeth” simply wondering: “What law have I transgressed against?” ( to Antigone again). History of our civilization must answer the question.
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