IN THE HIGH COURT OF DELHI AT NEW DELHI
(Under Article 226 of Constitution of India)
CWP NO. 1357 OF 2007
SHIVKANT JHA .......... Petitioner
UNION OF INDIA & ORS ..... Respondents
NDOH : 12.11.2008
COUNTER AFFIDAVIT ON BEHALF OF UNION OF INDIA (RESPONDENTS)
PLACE : NEW DELHI
DATED : 11.11.2008
S K DUBEY/DEEPAK KUMAR, ADVOCATES,
L-1, SOUTH EXTENSION-II, NEW DELHI
IN THE HIGH COURT OF DELHI AT NEW DELHI
(Under Article 226 of Constitution of India)
CWP NO. 1357 OF 2007
SHIVKANT JHA .......... Petitioner
UNION OF INDIA & ORS ..... Respondents
COUNTER AFFIDAVIT ON BEHALF OF
UNION OF INDIA (RESPONDENTS)
Affidavit of JAYANT KUMAR S/o M.P. SHAH aged about 44 years working as Addl. CIT(Judicial) N.Delhi.
I, the above named deponent do hereby solemnly affirm and state as under:
1. I say that I, JAYANT KUMAR, am duty authorized and competent to swear this affidavit on behalf of the respondent.
2. I have gone through the contents of the above Writ Petition and understood its contents. I am conversant with the facts and circumstances of the case based upon the information as contained in the official record maintained in the office during the normal course of business.
3. At the outset it is submitted that the averments made in the present petition are specifically and categorically denied, except which are specifically admitted herein under:
Preliminary Submissions :
I. It is humbly submitted that entering into a treaty or agreement by the Executive is a policy decision of the Government and it is not appropriate for the Hon'ble Court in exercise the jurisdiction under Article 226 of the Constitution of India to disturb such decision. No fundamental Rights of the Petitioner or any other citizen have been violated by signing and ratifying the WTO Agreements. It is, therefore, humbly submitted that Article 226 of the Constitution of India is not attracted and the Petition under Article 226 challenging the policy decision of the Government to enter into treaty or an agreement may be dismissed at the threshold.
2. It is most humbly submitted that the final round of negotiations i.e. Uruguay Round of GATT, which has also resulted in the birth of World Trade Organization have been concluded in December, 1994 whereas the Petition challenging the said Uruguay Round on GATT and ratified by Govt. of India, has been filed by the Petitioner in 2007 and, therefore, it deserves to be dismissed on the ground of Latches alone.
3. It Is humbly submitted that, Article 253 and Article 246 Clause 1 read with Entry 14 of List 1 of Schedule 7 to the Constitution of India, empowers the Parliament to make any law for the whole or any part of territory of India, for implementing "any treaty, agreement or convention with any other country or countries or. any decision made at any international conference, association or other body" and therefore amendment and enactment of section 90 and section 90A of Income Tax Act is within the legislative competence of parliament and hence the petition challenging the legislative competence of Union of India deserves dismissal.
The Respondents in their submissions submit as under:
Treaty making power of Union Executive and the Parliament:
1. That in the age of globalization, every State is desirous and has entered into treaty and is entering into treaty, be it multilateral or bilateral, with the sole aim of overall development of the country. Globalisation offers unprecedented opportunities for expansion of international trade and investment - major generators of economic growth and development. At the same time, it has thrown an enormous challenge to policy makers and the governments worldwide in ensuring that the benefits of globalisation are fully realised and equitably shared both between countries at the international level and within countries at the national level. World Trade Organisation (WTO) has assumed a crucial role in today's international scenario. Trade has become a vital economic activity in the international and national spheres. The rule based trading regime provided by the WTO under the binding commitments of the member countries has given an enormous boost to international trade at the same time exports and imports have emerged as key areas of domestic economy, Therefore, the importance of having balanced multilateral trading system is obvious. In the national context, the Government and the Parliament are primarily responsible for giving effect to the needs and aspirations of people. The Government represents the will of people through Parliament. In fact, with regard to multilateral trading system the policy formulation in the Govt takes place on the basis of policy direction given by the Parliament. The treaty (challenged in the petition) entered into by India is not in derogation or inconsistent with the provisions of the Constitution of India. It is humbly submitted that the Government of India can only enter into a treaty in conformity with the constitutional provisions laid down in the Constitution of India.
2. That India has been a consistent supporter of an orderly multilateral trading system. The WTO Agreement incorporates and carries forward the concept of Most Favoured Nation treatment from all other member countries. This is particularly beneficial to developing countries whose economic leverage is limited. Besides the Most Favoured Nation principle, the WTO agreement also establishes various other rules and principles for governing international trade on a stable and orderly basis. If any rule is violated, the aggrieved country can resort to the dispute settlement mechanism of the treaty.
3. That under the Constitution of India, the Constitution has provided / laid down very clear provision regarding making a treaty, ratifying the treaty and acceding to the treaty, whereas Article 73 of the Constitution of India provides for extent of the executive powers of the Union which empowers the Executive Wing of the Government to all matters with respect to which Parliament has power to make Laws and Article 73(1)(b) empowers the Executive of the Union to exercise all rights, authority and jurisdiction as are exercisable by Government of India by virtue of any treaty. A concurrent reading of the above said provision makes it clear that Union Executive i.e. Government of India has complete power to enter into any treaty and to ratify it.
4. That Article 246 effects a distribution of legislative power between the Union and the States and Article 246 (1) says "Parliament has exclusive power to make law with respect to any of the matters enumerated in list 1 in the 7th schedule which is referred to as Union list. Clause 2 speaks of the concurrent power of Parliament and state legislature to legislate with respect to matters in the State list. Clause 4 empowers the Parliament to make law with respect of union territories without any limitation of division of legislative power.
5. That Entry 14 of list 1 of 7th schedule provides the subject matter as follows:-
"Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign
From a reading of article 246 along with said entries, it is obvious that the Parliament is competent to make a law with respect to the several matters mentioned in the above entries. It is squarely placed within legislative competence of the Parliament. By virtue of article 73 of the Constitution, the executive power of the Union extends, in the absence of Parliamentary legislation to the matters with respect to which the Parliament has power to make law subject of course to constitutional limitation.
6. That Article 253 is one of those set of articles, which provides certain exceptional situation in which the Parliament has powers to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body.
7. That in Maganbhai Ishwaribhai Patel case [1970(3) SCC 400] the Supreme Court while observing the decision of "The Judicial Committee in Attorney-General for Canada v. Attorney-General for Ontario and Others, which made some observations in the context of a rule applicable within the British Empire, which are pertinent:
"It will be essential to keep in mind the distinction in between (1) the formation, & (2) the performance, of the obligations constituted by a treaty, using that word as comprising any agreement between two or more sovereign States. Within the British Empire there is a well-established rule that the making of a treaty is an executive act, while the performance of its obligations if they entail alteration of the existing domestic law, requires legislative action. Unlike some other countries, the stipulations of a treaty duly ratified do not within the Empire, by virtue of the treaty alone, have the force of law. If the national Executive, the Government of the day, decide to incur the obligations of a treaty which involve alteration of law they have to run the risk of obtaining the assent of Parliament to the necessary statute or statutes. * * Parliament, no doubt, * * * has a constitutional control over the Executive; but it cannot be disputed that the creation of the obligations undertaken in treaties and the assent to their form and quality are the function of the Executive alone. Once they are created, while they bind the State as against the other contracting parties, Parliament may refuse to perform them and so leave the State in default."
The power of entering into a treaty is an inherent part of the sovereign power of the State. The Hon'ble Supreme Court had observed that "These observations are valid in the context of the constitutional set up. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition of the entry into a international treaty in times either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The Executive is qua the State competent to represent the State in all matters international and may by agreement, convention or treaties incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under Entries 10 and 14 of List I of the Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the laws of the State. If the rights of the citizens or others which are justifiable are not affected, no legislative measure is needed to give effect to the agreement or treaty (Maganbhai Ishwarbhai Patel Vs. Union of India 3 SCC 400).
It is humbly submitted that the Parliament has been kept informed of the developments with regard to trade negotiations. The following is the procedure followed in India regarding the consultation with the Parliament:-
• All key decisions pertaining to the WTO negotiations are taken with the approval of the Minister-in-charge of the Department of Commerce, after due consultations in the Group of Ministers (GOM) and Cabinet Committee on WTO (CC WTO).
• In the Indian Parliamentary system, members of Parliament are free to raise any issue relating to trade negotiations through various procedural devices viz. Questions, Calling Attention, Adjournment Motion, Short Duration Discussions etc. Of these, the popular device is by asking Questions to the concerned Minister in the Parliament.
• There is a Consultative Committee of Parliament, which is regularly kept informed of the developments in the on-going negotiations. The Members of this Committee are free to raise issues and give suggestions to the Cabinet Minister-in-charge of the Department of commerce, in any area relating to the trade negotiations.
• In the Parliament, there are Departmentally Related Standing Committees besides other Parliamentary Committees covering under their jurisdiction all the Ministries/ Departments of Government of India. Each of these Committees consists of members drawn from both the Houses of the Parliament. The Standing Committee on Commerce exercises oversight on the working of the Ministry of Commerce & Industry. With the emphasis on functioning to concentrate on long term plans, policies guiding the working of the Ministry, it is providing necessary direction, guidance and inputs for broad policy formulations and in achievement of the long term national perspective by the executive.
It is further submitted that the Department of Commerce took the following steps before final act of Uruguay Round of discussions and the WTO agreements were ratified and signed:-
i) Discussion papers were circulated to all Member of Parliament representing the electors of the entire country. There has been extensive discussion in Parliament over various aspects of the on-going negotiations. Over 180 questions were put to the Government from time to time and answers thereto furnished on the floor of both Houses of Parliament.
ii) The issues were discussed from time to time by the concerned Consultative Committee of Parliament for the Ministry of Commerce.
iii) The Standing committee of Parliament (being the Gujral Committee referred to in the plaint) also held a number of hearings on the Uruguay Round of negotiations which extended over most of 1992.
iv) A Group of Minister was constituted to hold consultations on the proposals. The Group of Ministers held extensive consultations with various political parties, industry associations, journalists, economists, lawyers, eminent personalities and individuals and other interest groups. Careful note was made of the comments offered and views expressed.
v) The Minister of Commerce invited all the major political parties to hold discussions and most of them participated in discussions pursuant to the invitation. Their views were also carefully noted.
vi) There were a number of discussions held over the electronic media namely Doordarshan and All India Radio, besides the subject being intensively debated and covered in all the major newspapers of this country.
vii) There were seminars and conferences held by different groups during the course of which a wide range of views and opinions were expressed, criticisms offered, positive advantages pointed out and the desirability of participating in the multilateral trade discipline debated.
viii) Chief Secretaries of all States were specifically addressed explaining aspects of the Dunkel Proposals which were of special interest to the States.
ix) All Chief Ministers of States were personally invited by the Minister of Commerce, Government of India for detailed discussions on the Final Act and they were requested to indicate their respective conveniences for a meeting with him. Some of the Chief Ministers did avail of the opportunity and held discussions with the Minister of Commerce. Their views were carefully noted.
x) The Government of India was fully aware and conscious of the range of views on all material aspects of the subject and the issues involved and these were kept in view in the course of the negotiations.
xi) The government of India believes that it was able to achieve on the whole a balanced package which is now embodied in the WTO Agreement.
xii) In the circumstances stated above, it is absolutely incorrect to allege that the Government of India has attempted to suppress facts or to mislead the public in any way whatsoever. The conduct of the government has been totally transparent. It was, however, for the government to take decisions from Time to time after being aware of and after taking into account divergent views on each relevant issue.
The following facts are also submitted before this Hon'ble Court:-
a) In 1947, a multilateral treaty namely, the General Agreement on Tariffs and Trade (GATT) was established by an instrument which laid down a set of multilateral agreed rules to govern international trade. The GATT 1947 treaty (which came into force in 1948) was initially subscribed to by 23 countries as founder members of which India was one. The GATT 1947 treaty also provided a forum for trade negotiations through which the world trading environment was liberalised and made more predictable. GATT 1947 was both a code of rules for international trade as* well as a forum in which countries could discuss and find solutions to their trade problems.
b) The discipline established by GATT in international trade since 1948 has benefitted India to a very large extent. This was because two important principles, namely, the most favoured nation principle and the national treatment principle formed part of GATT 1947. The former implies that treaty members may not discriminate against other members of the treaty in the matter of applying the provisions of the treaty, National treatment implies that any discrimination against foreign products has to be made at the national border and not thereafter.
c) Periodic negotiations have been held to reduce tariff, and non-tariff barriers to international trade. Over nearly four decades of operation of GATT a substantial body of jurisprudence has developed around the treaty provisions. The treaty provisions have also been elaborated and amplified through a number of subsidiary agreements, codes and decisions governing inter-alia the operation of trade policy instruments like anti-dumping actions etc.
d) The beneficial results flowing from GATT attracted more and more countries to join it and as on 1.1.97, the membership stood at 129 accounting for more than 80% of the total world trade.
e) The eighth round of periodic negotiations to develop and carry GATT forward was the Uruguay Round which commenced at Punta del Este in Uruguay in 1986. The Uruguay Round which was more ambitious compared to its predecessors in as much as it included in its ambit not only negotiations on trade in goods (hitherto the only area covered by GATT) but also on trade in services, on trade-related intellectual property rights and on trade related investment measures. In the light of the evolving local and global economic circumstances and trends, the Government of India accepted the agenda of the negotiations in 1986 and has participated in the negotiations since then.
f) The Uruguay Round of negotiations generated sharp differences of opinion among member countries on certain subjects. In order to proceed further in the matter, one Mr. Arthur Dunkel, the then Director General of GATT, in December 1991, prepared a set of proposals, taking into account the negotiations that had taken place among the member countries and the area of differences which still persisted and gave his perception of a package that could accommodate the interests of all the participating countries. These proposals came to be known as the Dunkel Proposals or the Dunkel Text on which further negotiations were carried on.
g) The Uruguay Round of negotiations continued with the Dunkel Proposals as the basis and was concluded on the 15th December 1993. What emerged was the decision to set up a World Trade Organisation (WTO) through the WTO Agreement to which were annexed various agreements, understandings, decisions and declarations embodied in what is called the Final Act. The final results embodied in the Final Act were transmitted to the Ministers of the participating countries for their consideration. The Ministers met at
Marakkesh from 12-15 April, 1994. At this meeting, the following documents, inter alia, were open for signatures:
• The final Act of the Uruguay Round by signing which the signatories agreed:
"(a) to submit, as appropriate, the WTO Agreement for the consideration of their respective competent authorities with a view to seeking approval of the Agreement in accordance with their procedures; and
(b) to adopt the Ministerial Declarations and Decisions."
• The Agreement establishing the World Trade Organisation (for their definitive acceptance or subject to ratification).
• On the 15th April 1994, India along with 110 other countries signed the Final Act. 104 countries (excl India) also signed the WTO Agreement, some of them definitively, Government of India formally ratified the WTO Agreement, some of them definitively. Government of India formally ratified the WTO Agreement on 30.12.1994. The WTO Agreement came into force with effect from 1.1.1995.
• It may be clarified that the treaty embodied in the final Act is not a self-executing treaty. It has to be given effect through administrative procedures and where necessary, legislation. It may also be noted that the WTO Agreement contains a provision under which a participating member may, after giving six months notice, withdraw from the treaty altogether.
Constitutional validity of Sections 90 & 90A of the Income Tax Act
1. The Petition of the Petitioner challenging the Constitutional validity of Sections 90 and 90A of the Income TAx Act is based primarily on two grounds:
(i) Certain substitutions and insertion made in Section 90/Section 90A are bad in law as they transgress constitutional limitations ensuing from the Fundamental Rights.
(ii) These suffer from vice of excessive and unguided legislation.
2. The whole challenge of the petitioner is without any basis and is liable to be rejected in view of the following submissions:-
The petitioner has alleged that "DTA discriminates inter-se the native assesses and the foreigners in the matter of taxation on income where the taxable events take place in
the territory of India".
The contention of the petitioner is without any basis. The power of State to make classification for purposes of taxation is wide and flexible and it may decide the persons
or objects to be taxed.
A Statute is not open to attack on the ground that it taxes some persons or objects and not others. Supreme court in Khyerbari Tea Company Ltd. Vs. State of Assam (AIR 1964 SC 925) has held that a legislature, that is competent to levy tax, must be given full freedom to determine which articles should be taxed, in what manner and at what rate. In tax matters, the State is allowed to pick and choose objects, persons, methods and rates of taxation, if it does so reasonably.
A tax statute can be held to contravene Article 14 if it purports to impose tax on the same class of property in which situation it may lead to obvious inequality. But a taxing statute is not invalid on the ground of taxation merely because other objects could have been but are not taxed (V.J. Ferriera Vs. Municipal Corporation of Greater Bombay (1972) 1 SCC 70, 79).
R.K. Garg Vs. UOI (1981 4 SCC 675), commonly known as "Bearer Bonds Case", is another glaring example of a tax related law having been upheld under Article 14 on the ground that it made a reasonable classification between those who had and who did not have blAck money, and this classification had a nexus with the object of law.
In view of the settled legal position as discussed above, it would be misconceived to say that provisions of Section 90 and 90A of the Income Tax Act, 1961 are discriminatory and violate any of the Fundamental Rights enshrined in the
Constitutional validity of delegated legislation.
Section 90 was introduced in the Income Tax Act, 1961 with a view to enable the tax administration to tackle the problem of tax evasion having international ramifications.
Apart from the major objective of providing double taxation relief, Double Taxation Avoidance Agreements are also entered into with other countries for developing mutual trade and investment. As the existing law did not cover this purpose, a new clause was inserted in Section 90 vide Finance Act, 2003. It was provided therein that the Central Government may enter into an agreement with the government of any country outside India for granting relief in respect of Income Tax chargeable under the Income Tax Act under the corresponding law of the other country to promote mutual economic relations, trade and investment. There is no legal or constitutional infirmity in encouraging and developing international trade, commerce and investment through legislative amendments.
It was seen that certain terms used in Double Taxation Avoidance Agreements had not been defined either in the Agreements or in the Income Tax Act. Therefore, a need was felt to address the resultant problem of differing interpretation of such terms. Accordingly, sub-section (3) was inserted in Section 90 vide Finance Act, 2003 to empower the Central Government to define such terms by way of a notification in the official gazette. It is well settled in law that if an Act gives sufcient guidance to an authority for the purpose of issuing a notification, it cannot be said that there is excessive delegation. It has been held by the
Apex Court in the case of A.N. Parasuraman Vs. State of Tamil Nadu (1980) 4 SCC 63 that after the legislature lays down adequate guidelines for the exercise of power, it is permissible to leave to the delegated authority the task of implementing the object of the Act. It is also an established principle that legislature can delegate its powers to the executive even in matters relating to taxation laws, provided there are necessary guidelines by which economic and social goals of the State can be achieved. In Babu Ram Jagdish Kumar & Company. Vs. State of Punjab (1979 (3) SCC 616), it was held by the Apex Court that delegation of certain powers to State Government to determine whether any class of goods should be included or excluded from certain schedule of the Punjab Central Sales Tax Act, cannot be considered unconstitutional.
In the context of Indo-Mauritius Tax Treaty, the Supreme Court in Union of India and others Vs. Azadi Bachao Andolan (263 ITR 706) examined, inter alia, the issue whether the DTAA is illegal and ultra vires the powers of the Central Government under Section 90 of the Income Tax Act. Following observations were made by the Apex Court -
"Section 90 empowers the Central Government to enter into agreement with the Government of any other country outside India for the purposes enumerated in clauses (a) to (d) of sub-section (1). While clause (a) talks of granting relief in respect of income on which income tax has been paid in India as well as in the foreign country, clause (b) is wider and deals with "avoidance of double taxation of income" under the Act and under the corresponding law in
force in the foreign country...... Even if we accept the
argument of the respondent that the DTAC is delegated legislation, the test of its validity is to be determined, not by its efficacy, but by the fact that it is within the parameters of the legislative provision delegating the power. That the purpose of the DTAC is to effectuate the objective in clause (a) and (b) of sub-section (1) of section 90, is evident upon a reasonable construction of the terms of the DTAC. As long as these two objectives are sought to be effectuated, it is not possible to say that the power vested in the Central Government, under Section 90, even if it is delegated power of legislation, has been used for a purpose ultra vires the intendment of the section. The respondents tried to highlight a number of unintended deleterious consequences which, according to them, have arisen as a result of implementation of the DTAC. Even if they be true, it would not enable this court to strike down the delegation legislation as ultra vires. The validity and the vires of the legislation, primary, or delegated, has to be tested on the anvil of the law making power. If any authority lacks the power, then the legislation is bad. On the contrary, if the authority is clothed with the requisite power, then irrespective of whether the legislation fails in its object or not, the vires of the legislation is not liable to be questioned..."
Both sections 90 and 91 of the Act have adequate in-built guidelines to define the limits of Executive discretion in issuing such notification. It has been specifically provided in aforesaid sub-section (3) of section 90 that the meaning assigned to any such term through the notification, which is not defined in the Income Tax Act or DTAA, cannot be inconsistent with the provisions of the Income Tax Act or Agreement. Similarly, in the case of section 90A, the scope or meaning of any term not defined in the Act or in the agreement will have to be consistent with the provisions of the Act or agreement. Thus, no unfettered or unguided power has been conferred on the Central Government. Instead, the Central Government can exercise such power only in terms of the legislative policy contained in the said section and in the matter laid down in the legislation itself. This power to assign meaning to specific terms has to perforce be consistent with the Income Tax Act which is a creature of the legislature. Adequate guidelines have, therefore, been laid down for the exercise of such power of notification within the four corners of the Income Tax Act in accordance with Article 265 of the Constitution. The said provision is, therefore, neither unreasonable nor arbitrary.
Signing of DTAAs between designated nongovernmental representatives of two countries is an international practice. Following the same, in the interests of investor protection through double taxation relief, a need was felt to empower the Central Government to adopt such agreements on a case-by-case basis through a notification. Accordingly, section 90A was inserted vide Finance Act, 2006 empowering the Central Government to adopt any agreement made between specified associations for double taxation relief, subject to conditions specified therein. This is in accordance with the powers vested with the Executive under Article 73 of the Constitution.
Further, to be notified by the Central Government, such specified association has to function under any law of India or laws of the specified territory outside India. Specified territory also has to be notified by the Central Government for the purposes of the section. It is judicially settled that the legislature having laid down the broad principles of its policy in the legislation can leave the details to be supplied by the administrative authority. Section 90A leaves no scope for any arbitrary action by the Executive since the notification of both specified association' as well as specified territory' will have to be in accordance with the legislative policy of the country.
It, therefore, becomes clear that the provisions of Section 90 and 90A of the Income Tax Act do not amount to any sort of excessive delegation and are, therefore, not unconstitutional. If the legislature has performed its essential function of laying down the policy of the law and providing guidance for carrying out the policy, there is no constitutional bar against delegation of subsidiary or ancillary powers in that behalf.
3. The challenge of the petitioner to the extent that the provisions relating to Mutual Agreement Procedure (MAP) is ultra vires and without statutory foundation and is also not maintainable and is liable to be rejected.
Section 90 of the Income Tax Act, 1961 ('the Act') provides that the Central Government may enter into an agreement with the Government of any country outside India-
(a) for the granting of relief in respect of-
(i) income on which have been paid both income-tax under this Act and income-tax in that country; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of case of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provision as may be necessary for implementing the agreement.
The Double Taxation Avoidance Agreement (DTAA) provides for Mutual Agreement Procedure (MAP) for resolution of a case with a view to the avoidance of taxation which is not in accordance with the Agreement. Section 295 (2) (h) of the Income-tax Act, 1961 empowers the Central Board of Direct Taxes, to make rules providing the procedure for giving effect to the terms of any agreement for the granting of relief in respect of double taxation or for the avoidance of double taxation which may be entered into by the Central Government.
Thus, the MAP has a statutory backing and it is incorrect to say that it lacks statutory foundation and it has been introduced through Executive's Act. Further, an Article on MAP exists in our treaties since 1958 and is not a new provision being added in our treaties.
The petitioner has mentioned that the United States has devised methods under which neither the purpose of MAP is defeated nor the statutory protocol is subverted and has referred to the observation in the C&AG Report for the year ended March, 2004.
In respect of the abovementioned observation, it is to be stated that in the United States, the appeals system is completely different. The Internal Revenue Service appeal system allows the differences between the taxpayer and the IRS to be settled within the system. An IRS tax decision can be appealed against in the local Appeals office which is separate from and independent of the IRS office taking the action which the tax payer disagrees with. The Appeals office is the only level of Appeal within the IRS and is not an office of adjudication but is more in the nature of an arbitrator which attempts to resolve the tax dispute between taxpayer and the IRS by taking advantage of various programmes of the tax administration. The Appeals work to settle disputes so as to avoid court cases.
As per the Revenue Procedure 2002-52 of Inland Revenue Service of USA, taxpayers that disagree with a proposed US adjustment either may pursue their right of administrative review with appeals before requesting competent authority assistance or may request competent authority assistance immediately. The US Competent Authority also may request Appeals involvement if it is determined that
such involvement would facilitate the negotiation of a mutual agreement. Since the Appellate proceedings in the US are not in the nature of judicial proceedings but are more in the nature of administrative review of the action of the IRS, it is possible for the Appellate Authorities and the IRS to work in close coordination. In case the taxpayer and the IRS disagree after the appeal's conference the taxpayer is entitled to take his case to the United States tax court. The appeal before the US Courts is not against the outcome of the appeals conference but against the adjustment made by the IRS.
In India, the office of the CIT (Appeals) is a quasi judicial authority and it is the decision of the CIT (Appeal) which is litigated further in the Courts. The Appeals procedure of the Inland Revenue is not an appellate proceeding in the sense that it is in India and cannot be adopted by India. Moreover, in view of the provisions of sub-section (1) of Section 119 of the I.T. Act, CBDT is prohibited from interfering with the discretion of Commissioner of Income Tax (Appeals). Thus, the system in the United States cannot be compared with that in India.
4. Comments on the evaluation of MAP provision:
Paragraph 1 of Article relating to MAP provides that where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 24, to that of the Contracting State of which he is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement.
As mentioned above, the MAP has been provided for dealing with the cases where taxation has not been made in accordance with the provision of the DTAA. Therefore, this procedure is available to non-residents. The cases of residents which are not covered by the provisions of the DTAA cannot be brought within the provisions of MAP. Those cases have to be covered by the appellate procedure provided under the domestic law.
Para 2 of Article, relating to MAP provides that the competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.
The term 'competent authority' is defined in almost all our treaties. The statement in the writ petition which states that paragraph 2 of the MAP Article is unreasonable and arbitrary is baseless. Since the term 'competent authority' is defined in our tax treaties, the grant of power to the competent authority is in no way breach of the Constitutional
Para 3 of Article MAP provides that the competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Agreement.
This provision only authorizes the competent authority to resolve by mutual agreement any difficulties or doubts relating to application or interpretation of the agreement. The authority is not vested in competent authority of only one country. The competent authorities of both the countries have to resolve the difficulties or doubts relating to interpretation or application of the Agreement. If such a provision is not there, a number of interpretational issues may arise which would take a very long time to settle down following the due procedure of legal battles and may defeat the purpose of the DTAAs i.e. avoidance of double taxation and prevention of fiscal evasion so that there is free flow of technologies and capital between the countries. Thus, MAP has been provided for speedy disposal of cases where taxation is not in accordance with the DTAA.
Paragraph 4 of Article relating to MAP only provides that the competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States. Since paragraph 4 only provides the method of communication between the competent authorities, the assertion made by the petitioner that it is more than an facade of pretension is without any basis.
5. The petitioner has also sought to challenge instructions No.12 dated Ist November 2002 and the Rules in Part XIX C of the Income Tax Rules, 1962 pertaining to MAP on the ground that they are ultra vires being ex facie in breach of Fundamental Rights Articles 14, 19 (1) (a) and 21 of the Constitution of India.
This challenge is also liable to be rejected in view of the following submissions:-
Towards the end of 1990s it was noticed that although cases were resolved at the level of competent authorities, there were difficulties in getting the decision implemented at the field level as the concept of MAP was not every well known to the field formations. Such non-implementation of the decisions arrived at the level of the competent authorities of the two States led to embarrassment to the Government vis-a-vis its treaty partners.
Since the decision under MAP may be taken when proceedings were pending at various stages, rules were required to be framed for specifying the procedure for MAP. Accordingly, it was decided to issue a notification laying down the procedure for making an application to the competent authority under the MAP, for the action by the competent authority of India on the reference received under MAP and for the implementation of the agreement arrived at under MAP. However, in the mean time, for case where decision was already taken under MAP, it was decided that detailed instructions would be issued under section 119 of the Income-tax Act with the approval of the Central Government with the objective of:
i) Educating tax authorities/assessing officers regarding the need and circumstances under which MAP is invoked and the provisions contained in domestic law and tax treaties; and
ii) Laying down procedure for giving effect to decisions taken under MAP by the competent authority.
In accordance with the decision in the prceceding paragraph, Instruction No. 12/2002 dated 1.11.2002 was issued by the Board to the field authorities elaborating the concept of MAP and laying down, in detail, the procedure to be followed for giving effect to decisions undertaken by the competent authorities of the two States. Subsequently, rules 44G and 44H under the Income-tax Rules, 1964 were notified vide Notification No. S.O. 138 (E ) dated 6th February, 2003.
Rule 44G stipulated provisions for a resident assessee to make an application to the Competent Authority in India seeking to invoke MAP, if the assessee was aggrieved by any action of the tax authorities of any country outside India for the reason that, according to him, such action was not in accordance with the terms of DTAA with such other country outside India. The Rule also prescribed Form No. 34F for the purpose.
Rule 44H laid down the action by the competent authority of India on the reference received under MAP and the procedure for giving effect to the decision under the agreement.
After notification of the rules mentioned above, the Instruction continues to guide the assessing officers as it only elaborates the abovementioned rules.
The provision for Mutual Agreement Procedure is included in the tax treaties on a reciprocal basis and the Indian taxpayers can also take the advantage of such provision for speedy resolution of a taxation dispute if they consider that taxation by a foreign tax authority is not in accordance with the DTAA between India and the foreign country.
Legal and constitutional validity' of the Impugned Instruction and Rules:
In respect of the issue raised in the writ petition challenging the legal validity of the impugned instruction and Rules, it is stated that sub-section (1) of section 90 of the Act stipulates that the Central Government may enter into an agreement with the Government of any country outside India for granting double taxation relief, avoidance of double taxation, exchange of information, recovery of income tax etc. and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
In exercise of the powers conferred under section 90 of the Act, the Central Government has entered into DTAAs with various countries. In most of these treaties we have an article on MAP, which states that where the taxpayer of a Contracting State considers that the action of authorities of one Contracting State is not in accordance with the provisions of the DTAA, he may, irrespective of the remedies provided by the domestic laws of the two Contracting States, present his case to the competent authority of the State of which he is resident. The Article also provides that the competent authorities of the two States shall endeavour to arrive at a satisfactory solution to resolve the case by mutual agreement, in accordance with the provisions of the Treaty. The Article also states that the mutual agreement reached between the competent authorities shall be implemented notwithstanding any time limit or other procedural limitations in the domestic law of the Contracting States.
Clause 'h' of sub-section 2 of section 295 read with section 90 of the Act empowers Central Government to make such rules which shall provide for giving effect to the terms of any agreement for granting of relief in respect of double taxation or for the avoidance of double taxation which may be entered into by the Central Government under the Income Tax Act. Thus Central Government can frame rules in order to lay down procedure for MAP.
Section 296 of the Act provides that the Central Government shall cause every rule made under the Act to be laid as soon as may be after the rule is made before each House of Parliament and if both House agree in making any modification in the rule or both Houses agree that the rule should not be made, that rule shall thereafter have effect, only in such modified form or be of no effect, as the case may be. The impugned rules have been laid before the Parliament in accordance with the provisions of section 296 of the Act and have been approved without modification. Thus, the rules have the sanction of Parliament.
Further, the MAP resolution is adopted under the DTAA read with sub-section (2) of section 90 of the Income-tax Act, which provides that where the Central Government has entered into an agreement with the Government of any other country for granting relief of tax or for avoidance of double taxation, the provisions of the Income-tax Act shall apply only to the extent they are more beneficial to the assessee. Thus, if an agreement is reached between the competent authorities under MAP which is more beneficial to the assessee, the same shall be binding on the Income-tax Authorities so far as that particular assessee's case is concerned.
In view of the above it is stated that:
MAP is a special procedure arising out of the operation of section 90 of the Income-tax Act read with relevant provisions of the applicable DTAA and can be invoked when the taxpayer of one of the Contracting State is of the view that the action of the other State is not in accordance with the provisions of the DTAA;
DTAA provides for a well-laid procedure to resolve the MAP case by mutual agreement between the competent authorities of the two Contracting States on an amicable basis. The Article for MAP is included in the DTAAs on a reciprocal basis and taxpayers of both the States are benefited from the provisions contained therein;
Section 90(2) of the Act stipulates that in relation to an assessee to whom DTA applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Thus, if an agreement is reached between the competent authorities under MAP which is more beneficial to the assessee, the same shall be binding on the Income-tax Authorities so far as that particular assessee's case is concerned;
In order to outline clearly the procedure related to MAP under the DTAA, Instruction No. 12/2002 dated 1.11.2002 was issued by the Board to the field authorities elaborating the concept of MAP and laying down in detail the procedure to be followed for giving effect to decisions undertaken by the competent authorities of the two States under MAP.
Clause 'h' of sub-section 2 of Section 295 read with section 90 of the Act empowers Central Government to make such rules which shall provide for giving effect to the terms of any agreement for granting of relief in respect of double taxation or for the avoidance of double taxation which may be entered into by the Central Government under the Income-tax Act.
Vide Notification No. S.O. 138(E) dated 6th February 2003 Rules 44G and 44H were notified under the Income Tax Rules, 1964 for specifying the provisions relating to the procedure for application under MAP by a resident assessee and for laying down the action by the competent authority of India on the reference received under MAP, respectively, including the procedure for giving effect to the decision under the
The aforesaid rules were laid before the Parliament in accordance with section 296 of the Act and were approved without modification and, therefore, have the sanction of the Parliament.
Thus, the abovementioned Instruction and Rules are clearly in accordance with the provisions of the Income-tax Act, 1961 read with the MAP Article of the DTAA and there is no case for quashing the same being illegal or ultra vires the Constitution of India.
6. The petitioner has further challenged that the Double Taxation Avoidance Agreements entered into by the Central Government be held domestically inoperative on account of the fact that the Executive lacked competence to enter into such Agreements, and also on account of violation of Articles 14,19,21 and also Article 265 of the Constitution of India.
7. This challenge is also not maintainable and is liable to be rejected for the following reasons:-
Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of the taxable entity maintenance of a permanent establishment, and so on. A country might choose to emphasize one or the other of the aforesaid factors for exercising fiscal jurisdiction to tax the entity. Depending on which of the factors is considered to be the connecting factor in different countries, the same income of the same entity might become liable to taxation in different countries. This would give rise to harsh consequences and impair economic development. In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter into bilateral treaties, Conventions or agreements for granting relief against double taxation.
The power of entering into a treaty is an inherent part of the' sovereign power of the State. Article 73 of the Constitution of India extends the executive power to the matters enumerated in List-1, including the maters in entry 14 thereof on entering into treaties and implementation of treaties and to exercise of such rights, authority and jurisdiction as are exercisable by the Government of India by virtue of any treaty agreement. Our Constitution makes no provision making legislation a condition for the entry into an international treaty in time either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The executive is qua the
State competent represent the State in all mailers international and may by agreement, convention or treaty incur obligations which in international law are binding upon the State (Maganbhai Iswarbhai Patel v. Union of India (1970 (3) SCC 400).
When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In India, section 90 of the Income-tax Act has been incorporated in the Income-tax Act which empowers the Central Government to enter into an agreement with the Government of any other country for the granting of relief in respect of income on which income-tax has been paid under the Income-tax Act, 1961 and in the other country, for the avoidance of double taxation of income under the IT Act and under the corresponding law in force in the other country, for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under the laws of the two countries or for recovery of income-tax under the laws of the two countries.
Section 90 was brought on the statute book precisely to enable the executive to negotiate a DTAA and quickly implement it. Section 90 enables the Central Government to enter into a DTAA with the foreign Government. When the requisite
notification has been issued thereunder, the provisions of the sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAA is entitled to seek benefits there under, even if the provisions of the DTAA are inconsistent with the provisions of the Income-tax Act, 1961.
The Supreme Court in the case of Union of India v. Azadi Bachao Andolan (2003 (263) ITR 706 observed as follows:
"A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the principle of charge ability to tax under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC."
Further, the Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar (2004 (267) ITR 654) held-
"The provisions of such agreement cannot fasten a liability where the liability is not imposed by a local court. Where a tax liability is' imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of this agreement would prevail over the Act in. view of the provisions of section 90 (2)."
8. That in view of the submissions made above, it is submitted that MAP provisions in India have statutory foundation and Instruction No. 12 of 2002 dated 1st November, 2002 and Rules in Part IX-C of the Income Tax Rules, 1962 pertaining to MAP are in accordance with the provisions of Income Tax Act, 1961 read with MAP Article of DTAA and the Petitioner has not been able to make out any case for quashing the same being illegal or ex facie in breach of Fundamental Rights under Article 14, 19 & 21 of the Constitution of India. It is further submitted that the executive is competent to enter into Double Taxation Avoidance Agreements and the same are constitutionally valid.
1. The contents of the corresponding para are denied except those which are matter of record. The Respondent craves leave of this Hon'ble Court to make a reply to the averments in the corresponding para at the appropriate time.
2. It is humbly stated that there has been no violation of any provisions of the Constitution of India/in signing and ratifying the Uruguay Round of Final Act. It is also denied that there has been any breach of Fundamental Rights and basic structure of the Constitution. The objectives sought to be achieved through the Petition do not call for any remedy from the Hon'ble High Court.
3 & 4. The contents of the corresponding paras are incorrect and misleading. As explained herein before in the submissions that the Parliament has power to make law relating to entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries. Under Article 73(1) of the Constitution of India, the executive power of the Central Govt extends to the matters with respect to which Parliament has power to make laws and to the exercise of such rights, authority and jurisdiction as are exercisable by the Govt of India by virtue of any treaty or agreement. In every case where implementation of the treaty by the executive would impinge on the rights of the citizens, Parliament would be required to pass a law. Since there has been no such impingement, no law has been required to be passed in this regard. Therefore, the executive has been well within its right to sign and ratify the Act leading to establishing WTO. It is further respectfully submitted that no fundamental rights of any citizen of India have been abrogated in entering into Double Taxation Avoidance Agreement and in substitution and insertions made in the Finance Act 2003 and 2006.
5. to 7. The contents of the corresponding para are denied except those which are matter of record. The Respondent craves leave of this Hon'ble Court to make a reply to the averments in the corresponding para at
the appropriate time.
8. to 10. The contents of the corresponding paras deal with the issues raised in the Petition. These issues are to be adjudicated upon by the Hon'ble High Court. However, the Petitioner craves leave of this Hon'ble Court to make the reply to the averments in the corresponding para at the appropriate time.
11. The contents of this para are frivolous, distortion of facts and designed to mislead the Hon'ble Court. It is respectfully submitted that the final Act embodying the results of the Uruguay Round of Multilateral Trade Negotiations was signed and ratified by the Govt after the implications and issues arising out of it were discussed in detail from time to time by the concerned Consultative Committee of Parliament for the Department of Commerce. The Standing Committee of the Parliament also held a number of hearings on the Uruguay Round of Negotiations. A Group of Ministers was constituted to hold consultations on the proposal. The Minister of Commerce invited all the major political parties to hold discussions. Their views were also carefully noted. The subject was also debated extensively over electronic media and through major newspapers of the country. The Govt of India has been able to achieve on the whole a balanced package which is now embodied in WTO Agreements.
12. to 28. The position of the answering Respondent No. 2, has been explained in its submissions made herein before. These are not being repeated for the sake of
29. to 67. The position of the answering Respondent No. 1, has been explained in its submissions made herein before. These are not being repeated for the sake of brevity,
68. to 81. Contents of the corresponding paras are denied. Article 253 of the Constitution of India confers exclusive legislative power on the Parliament td make
any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or any decision made at any international conference, association or other body. The executive powers of the Central Govt extends the matter with respect to which Parliament has power to make laws. The Constitution makes no provision making legislation a condition of the entry into an international treaty in times either of war or peace. The executive power of the union is vested with the President and is exercisable in accordance with the Constitution.
82. The contents of the corresponding para are denied except those which are matter of record. The Respondent craves leave of this Hon'ble Court to make a reply to the averments in the corresponding para at the appropriate time.
83-97 The averments made in these paras are based on surmises and conjectures and are hence denied. The concept and provisions of WTO agreements are in tune with the liberalization efforts undertaken by the Govt. of India over the past few years. Export growth is a critical element in the overall growth of the economy of the country. And it is in the country's interest to secure the best possible advantage in the export market. It will be a shortsighted policy to retreat into a shell and remain stagnant while other countries in the world make progress. The WTO agreements provide the country with the requisite environment to develop its trade. There is no compelling reason for India opting out of the multilateral trading system. India is a member of a global community and it is in India's interest to participate in international decision making
on political and economic matters. The treaty embodied in the WTO Agreement is not a self-operating or self-executing document. To subscribe to the WTO Agreement, it is required to take such appropriate legislative and executive measures, as, may be necessary, so as to conform to the provisions thereof. All executive and legislative measures would" obviously have to conform to the constitutional provisions. It is wholly incorrect to suggest that any provision of the treaty affects or infringes upon the constitutional rights and powers of the States or of any other body or authority as alleged at all.
98. to 101. The contents of the corresponding paras are wholly unjustified and incorrect and hence denied.
102. GROUNDS OF SEGMENT 1
Sub para 1-8
The contents of the corresponding para are denied except those which are matter of record. The Respondent craves leave of this Hon'ble Court to make a reply to the averments in the corresponding para at the appropriate time.
GROUNDS OF SEGMENT 2
The content of these paras are incorrect merely designed to confuse the issue. These arc denied as per submissions made herein before.
103. This para contains the Prayer made by the Petitioner. It is denied that petitioner is entitled for any relief prayed for in the prayer.
It is respectfully prayed that in view of the clear and settled position of law regarding the questions raised in the petition, this Hon'ble Court may graciously be
a) To dismiss the petition as not maintainable and devoid of merits,
b) To impose the cost of the present litigation against the petitioner and in favour of respondents,
c) To pass any other or further orders which this Hon'ble Court may deem fit and proper in the facts and circumstances of the case.
Verified at New Delhi on 11 day of Nov.
2008 that the contents of the above counter affidavit are correct to the best of my knowledge and as per the office records. The legal submissions made therein are believed to be true. No part of it is false and nothing material has been concealed therefrom.