In a judgment that will have a far-reaching impact on double taxation issues, the Delhi High Court has held that Parliament cannot change the terms of an international treaty by bringing in amendments in the domestic law, and any such executive action which seeks to effectively amend the international instruments by interpretative process lacks authority in law.
It held that no amendment to the Income-tax Act, whether retrospective or prospective, can be read in a manner so as to extend its operation to the terms of an international treaty. Thus, unilateral amendments to treaties are categorically prohibited, the HC said, adding that states are expected to fulfil their obligations under a treaty “in good faith and this includes the obligation to not defeat the purpose and object of the treaty.”
“Parliament, supreme as it may be, is not equipped with the power to amend a treaty. It is certainly true that law laid down by Parliament in our domestic context, even if it were in violation of treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty,” the HC said, while settling the vexed legal issue in the case Director of Income Tax vs New Skies Satellite BV.
“A treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain. It may decide to not follow the treaty, it may chose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal,” the HC stated, while casting doubt on the retrospectivity of amendment introduced by the Finance Act, 2012.
Prior to this judgment, the court had held that a payment for transmission by satellite does not constitute royalty. However, vide Finance Act, 2012, an amendment was brought in Section 9(1)(vi) to specifically include the satellite transmission within the definition of ‘royalty’.
Under Article 12 of DTAA, the general rule says that whereas the state of residence shall have the primary right to tax royalties, the source state shall concurrently have the right to tax the income, to the extent of 15% of the total income. Before the amendment brought about by the Finance Act, 2012, the definition of royalty under the Act and DTAAs were treated as pari materia (laws related to the same subject).
“…a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible,” the HC held, while relying on the Vienna Convention on the Law of Treaties, 1969. Article 39 of the convention provides that a treaty may be amended by agreement between the parties.
Legal experts termed this judgment as “extremely important.”
According to senior lawyer MS Syali, who argued the matter for New Skies Satellite, “The decision sets at rest the alleged doubts cast on the proposition by the Revenue because of the decisions in Director of Income Tax vs TV Today Network and Verizon Communications Singapore Pte vs The Income Tax Officer, International Taxation, by the Delhi and Madras High Courts, respectively. It is a classic exposition on the issue.”
Supreme Court lawyer Anuradha Dutt feels that “the far-reaching verdict will affect all non-resident and foreign companies, as India has DTAAs and bilateral agreements with a lot of countries. The HC has correctly held that any retrospective amendment to domestic laws cannot override international treaties. Any such changes will have to be separately agreed upon between the two nations.” Dutt adds that the judgment will impact various companies like GE who have similar cases pending before different fora.
The Andhra Pradesh HC in 2013 had given similar reasoning in the Sanofi case. The appeal filed by the income-tax department against the Andhra HC ruling has been admitted by the Supreme Court. The department is seeking to recover R1,058 crore in taxes from France’s Sanofi for its 2009 purchase of Hyderabad-based Shantha Biotechnics.
Sources in the tax department have also hinted at moving the apex court. They consider the Delhi HC judgement as a good case for appeal.
Says SC lawyer DL Chidananda, “It is trite law that Parliament cannot amend DTAAs unilaterally, but it is equally well-settled that once the Revenue establishes that right to tax a particular category of income is allocated to India by DTAA, by reason of source of income rule, the domestic law provisions will come into operation to bring to tax such income in the source country. It is in this context the amended provisions of income tax will apply. This aspect appears to be lost sight of by the HC.”