Full Judgement
Union of India and Anr Vs. Azadi Bachao Andolan and Anr [2003] Insc 494 (7 October 2003)
Ruma Pal & B.N. Srikrishna.
Appeal (civil) 8163-8164 of 2003 (Arising out of S.L.P.(C) Nos.20192-20193 of 2002) (@ S.L.P.(C) Nos. 22521-22522 of 2002) SRIKRISHNA,J.
Leave granted.
These appeals by special leave arise out of the judgment of the Division Bench of Delhi High Court allowing Civil Writ Petition (PIL)No.5646/2000 and Civil Writ Petition No.2802/2000.
The High Court by its judgment impugned in these appeals quashed and set aside the circular No.789 dated 13.4.2000 issued by the Central Board of Direct Taxes (hereinafter referred to as "CBDT") by which certain instructions were given to the Chief Commissioners/Directors General of Income-tax with regard to the assessment of cases in which the Indo - Mauritius Double Taxation Avoidance Convention, 1983 (hereinafter referred to as 'DTAC') applied. The High Court accepted the contention before it that the said circular is ultra vires the provisions of Section 90 and Section 119 of the Income-tax Act, 1961(hereinafter referred to as 'the Act') and also otherwise bad and illegal.
It would be necessary to recount some salient facts in order to appreciate the plethora of legal contentions urged.
FACTS
A: The Agreement The Government of India has entered into various Agreements (also called Conventions or Treaties) with Governments of different countries for the avoidance of double taxation and for prevention of fiscal evasion. One such Agreement between the Government of India and the Government of Mauritius dated April 1, 1983, is the subject matter of the present controversy. The purpose of this Agreement, as specified in the preamble, is "avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment". After completing the formalities prescribed in Article 28 this agreement was brought into force by a Notification dated 6.12.1983 issued in exercise of the powers of the Government of India under Section 90 of the Act read with Section 24A of the Companies (Profits) Surtax Act, 1964. As stated in the Agreement, its purpose is to avoid double taxation and to encourage mutual trade and investment between the two countries, as also to bring an environment of certainty in the matters of tax affairs in both countries.
Some of the salient provisions of the Agreement need to be noticed at this juncture. The Agreement defines a number of terms used therein and also contains a residuary clause. In the application of the provisions of the Agreement by the contracting States any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws in force in that contracting State, relating to the words which are the subject of the convention. Article 1(e) defines 'person' so as to include an individual, a company and any other entity, corporate or non-corporate "which is treated as a taxable unit under the taxation laws in force in the respective contracting States". The Central Government in the Ministry of Finance (Department of Revenue), in the case of India, and the Commissioner of Income Tax in the case of Mauritius, are defined as the "competent authority". Article 4 provides the scope of application of the Agreement. The applicability of the Agreement is determined by Article 4 which reads as under;
"Article 4 Residents
1. For the purposes of the Convention, the term "resident of a Contracting State" means any person who under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place or management or any other criterion of similar nature. The terms "resident of India" and "resident of Mauritius" shall be construed accordingly.
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his residential status for the purposes of this Convention shall be determined in accordance with the following rules:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (hereinafter referred to as his "centre of vital interests");
(b) if the Contracting State in which he has his centre of vital interest cannot be determined, or if he does not have a permanent home available to him in either Contracting State he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;
(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provision of paragraph 1, a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated." The Agreement provides for allocation of taxing jurisdiction to different contracting parties in respect of different heads of income. Detailed rules are stipulated with regard to taxing of Dividends under Article 10, interest under Article 11, Royalties under Article 12, Capital Gains under Article 13, income derived from Independent Personal Services in Article 14, income from Dependent Personal Services in Article 15, Directors' Fees in Article 16, income of Artists and Athletes in Article 17, Governmental Functions in Article 18, income of students and Apprentices in Article 20, income of Professors, Teachers and Research Scholars in Article 21, and other income in Article 22.
Article 13 deals with the manner of taxation of capital gains.
It provides that gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated. Gains derived by a resident of a Contracting State from the alienation of movable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment, may be taxed in that other State. Gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management is situated. With respect to capital gain derived by a resident in the Contracting State from the alienation of any property other than the aforesaid is concerned, it is taxable only in the State in which such a person is a 'resident'.
Article 25 lays down the Mutual Agreement Procedure. It provides that where a resident of a Contracting State considers that the actions of one or both of the Contracting State result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State of which he is a resident. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention. Thereupon, if the objection appears to be justified, the competent authority shall attempt to resolve the case by mutual agreement with the competent authority of the other Contracting State so as to avoid a situation of taxation not in accordance with the convention. This Article also provides for endeavour by the competent authorities of the Contracting States to resolve by mutual agreement any difficulties or doubts arising as the interpretation or application of the convention. For this purpose, the convention contemplates continuous or periodical communication between the competent authorities of the Contracting States and exchange of views and opinions.
B : The Circulars By a Circular No.682 dated 30.3.1994 issued by the CBDT in exercise of its powers under Section 90 of the Act, the Government of India clarified that capital gains of any resident of Mauritius by alienation of shares of an Indian company shall be taxable only in Mauritius according to Mauritius taxation laws and will not be liable to tax in India. Relying on this, a large number of Foreign Institutional Investors s (hereinafter referred to as "the FIIs"), which were resident in Mauritius, invested large amounts of capital in shares of Indian companies with expectations of making profits by sale of such shares without being subjected to tax in India. Sometime in the year 2000, some of the income tax authorities issued show cause notices to some FIIs functioning in India calling upon them to show cause as to why they should not be taxed for profits and for dividends accrued to them in India.
The basis on which the show cause notice was issued was that the recipients of the show cause notice were mostly 'shell companies' incorporated in Mauritius, operating through Mauritius, whose main purpose was investment of funds in India. It was alleged that these companies were controlled and managed from countries other than India or Mauritius and as such they were not "residents" of Mauritius so as to derive the benefits of the DTAC.
These show cause notices resulted in panic and consequent hasty withdrawal of funds by the FIIs. The Indian Finance Minister issued a Press note dated April 4, 2000 clarifying that the views taken by some of the income-tax officers pertained to specific cases of assessment and did not represent or reflect the policy of the Government of India with regard to denial of tax benefits to such FIIs.
Thereafter, to further clarify the situation, the CBDT issued a Circular No.789 dated 13.4.2000. Since this is the crucial Circular, it would be worthwhile reproducing its full text. The Circular reads as under:
"Circular No.789 F.No.500/60/2000-FTD GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES New Delhi, the 13th April, 2000 To All the Chief Commissioners/ Directors General of Income-tax Sub: Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) - Reg.
The provisions of the Indo-Mauritius DTAC of 1983 apply to 'residents' of both India and Mauritius . Article 4 of the DTAC defines a resident of one State to mean any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. Foreign Institutional Investors and other investment funds etc. which are operating from Mauritius are invariably incorporated in that country. These entities are 'liable to tax' under the Mauritius Tax law and are therefore to be considered as residents of Mauritius in accordance with the DTAC.
Prior to 1st June, 1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.
The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of article 13.
The aforesaid clarification shall apply to all proceedings which are pending at various levels." C: The Writ Petitions Circular No. 789 was challenged before the High Court of Delhi by two writ petitions, both said to be by way of Public Interest Litigation. The petitioner in CWP 2802 of 2000 (Azadi Bachao Andolan) prayed for quashing and declaring as illegal and void Circular No.789 dated 13.4.2000 issued by the CBDT. The petitioner in CWP 5646 of 2000 sought an appropriate direction/order or writ to the Central Government and made the following prayers:
"(a) issue such appropriate direction /order / writ as the Court deem proper, under the circumstances brought to the knowledge of the Hon'ble Court, to the Central Government to initiate a process whereby the terms of the Indo-Mauritius Double Taxation Avoidance Agreement are revised, modified, or terminated and /or effective steps taken by the High Contracting Parties so that the NRIs and FIIs and such other interlopers do not maraud the resources of the State.
(b) declare and delimit the powers of the Central Government under section 90 of the Income Tax Act, 1961 in the matter of entering into an agreement with the Government of any country outside India;
(c) declare and delimit the powers of the Central Board of Direct Taxes in the matter of the issuance of instructions through circulars to the statutory authorities under the Income tax Act, specially through such circulars which are beneficial to certain individual taxpayers but injurious to Public Interest.
(d) declare the illegality of Circular No.789 of April 13, 2000 issued by the Central Board of Direct Taxes and to quash it as a matter of consequence;
(e) issue mandamus so that the respondents discharge their statutory duties of conducting investigation and collection of tax as per law;
(f) issue appropriate direction/ order or writ of the nature of mandamus, as the Court deem fit, so that all remedial actions to undo the effects of the acts done to the prejudice or Revenue in pursuance of Circular No.789 are taken by the authorities under the Income tax Act, 1961" D : High Court's findings The High Court has quashed the circular on the following broad grounds:
(A) Prima facie, by reason of the impugned circular no direction has been issued. The circular does not show that it has been issued under section 119 of the Income-tax Act, 1961 and as such it would not be legally binding on the Revenue;
(B) The Central Board of Direct Taxes cannot issue any instruction, which would be ultra vires the provisions of the Income-tax Act, 1961. Inasmuch as the impugned circular directs the income-tax authorities to accept a certificate of residence issued by the authorities of Mauritius as sufficient evidence as regards status of resident and beneficial ownership, it is ultra vires the powers of the CBDT;
(C) The Income-tax Officer is entitled to lift the corporate veil in order to see whether a company is actually a resident of Mauritius or not and whether the company is paying income-tax in Mauritius or not and this function of the Income-tax Officer is quasi-judicial.
Any attempt by the CBDT to interfere with the exercise of this quasi-judicial power is contrary to intendment of the Income-tax Act.
(D) Conclusiveness of a certificate of residence issued by the Mauritius Tax Authorities is neither contemplated under the DTAC, nor under the Income-tax Act; whether a statement is conclusive or not, must be provided under a legislative enactment such as the Indian Evidence Act and cannot be determined by a mere circular issued by the CBDT;
(E) "Treaty Shopping", by which the resident of a third country takes advantage of the provisions of the Agreement, is illegal and thus necessarily forbidden;
(F) Section 119 of the Income-tax Act, 1961 enables the issuance of a circular for a strictly limited purpose. By a circular issued thereunder, neither can the essential legislative function be delegated, nor arbitrary, uncanalized or naked power be conferred;
(G) Political expediency cannot be a ground for not fulfilling the constitutional obligations inherent in the Constitution of India and reflected in section 90 of the Act. The circular confers power to lay down a law which is not contemplated under the Act on the ground of political expediency, which cannot but be ultra vires.
(H) Any purpose other than the purpose contemplated by section 90 of the Act, however bona fide it be, would be ultra vires the provisions of section 90 of the Income tax Act.
(I) While political expediency will have a role to play in terms of Article 73 of the Constitution, the same is not true when a Treaty is entered into under the statutory provision like section 90 of the Act.
(J) Avoidance of double taxation is a term of art and means that a person has to pay tax at least in one country; avoidance of double taxation would not mean that a person does not have to pay tax in any country whatsoever.
(K) Having regard to the law laid down by the Supreme Court in McDowell & Company v C.T.O , it is open to the Income-tax Officer in a given case to lift the corporate veil for finding out whether the purpose of the corporate veil is avoidance of tax or not. It is one of the functions of the assessing officer to ensure that there is no conscious avoidance of tax by an assessee, and such function being quasi-judicial in nature, cannot be interfered with or prohibited. The impugned circular is ultra vires as it interferes with this quasi judicial function of the assessing officer.
(L) By reason of the impugned circular the power of the assessing authority to pass appropriate orders in this connection to show that the assessee is a resident of a third country having only paper existence in Mauritius, without any economic impact, only with a view to take advantage of the double taxation avoidance agreement, has been taken away.
THE SUBMISSIONS
The learned Attorney General and Mr. Salve, for the appellants, have assailed the judgment of the Delhi High Court on a number of grounds, while the respondents through Mr.Bhushan, and in person, reiterated their submissions made before the High Court and prayed for dismissal of these appeals.
Purpose and consequence of Double Taxation Avoidance Convention To appreciate the contentions urged, it would be necessary to understand the purpose and necessity of a Double Taxation Treaty, Convention or Agreement, as diversely called. The Income-tax Act, 1961, contains a special Chapter IX which is devoted to the subject of 'Double Taxation Relief".
Section 90, with which we are primarily concerned, provides as under:
"90. Agreement with foreign countries.
(1) 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 income on which have been paid both income- tax under this Act and income-tax in that country, 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 cases 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 provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee." (Explanation omitted as not relevant) Section 4 provides for Charge of Income-tax. Section 5 provides that the total income of a resident includes all income which :
(a) is received, deemed to be received in India or
(b) accrues, arises or deemed to accrue or arise in India, or
(c) accrues or arises outside India, during the previous year.
In the case of a non-resident, the total income includes "all income from whatever source derived" which
(a) is received or is deemed to be received or,
(b) accrues or is deemed to accrue in India, during such year.
A person 'resident' in India would be liable to income-tax on the basis of his global income unless he is a person who is 'not ordinarily' resident within the meaning of section 6(b). The concept of residence in India is indicated in section 6. Speaking broadly, and with reference to a company, which is of concern here, a company is said to be 'resident' in India in any previous year, if it is an Indian company or if during that year the control and management of its affairs is situated wholly in India.
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 emphasise 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. Such treaties, conventions or agreements are called double taxation avoidance treaties, conventions or agreements.
The power of entering into a treaty is an inherent part of the sovereign power of the State. 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 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 to represent the State in all matters international and may by agreement, convention or treaty 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 law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty.
When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures.
In the United States such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act.
The purpose of section 90 becomes clear by reference to its legislative history. Section 49A of the Income-tax Act, 1922 enabled the Central Government to enter into an agreement with the government of any country outside India for the granting of relief in respect of income on which, both income-tax (including super-tax) under the Act and income-tax in that country, under the Income-tax Act and the corresponding law in force in that country, had been paid. The Central Government could make such provisions as necessary for implementing the agreement by notification in the Official Gazette. When the Income-tax Act, 1961 was introduced, section 90 contained therein initially was a reproduction of section 49A of 1922 Act. The Finance Act, 1972 (Act 16 of 1972) modified section 90 and brought it into force with effect from 1.4.1972. The object and scope of the substitution was explained by a circular of the Central Board of Taxes (No.108 dated 20.3.1973) as to empower the Central Government to enter into agreements with foreign countries, not only for the purpose of avoidance of double taxation of income, but also for enabling the tax authorities to exchange information for the prevention of evasion or avoidance of taxes on income or for investigation of cases involving tax evasion or avoidance or for recovery of taxes in foreign countries on a reciprocal basis. In 1991, the existing section 90 was renumbered as sub-section(1) and sub-section(2) was inserted by Finance Act, 1991 with retrospective effect from April 1, 1972. CBDT Circular No. 621 dated 19.12.1991 explains its purpose as follows:
"Taxation of foreign companies and other non- resident taxpayers -
43. Tax treaties generally contain a provision to the effect that the laws of the two contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the treaty. It may so happen that the tax treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the Indian law existing at that point of time. However, the Indian law may subsequently be amended, reducing the incidence of tax to a level lower than what has been provided in the tax treaty.
43.1. Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-Ã -vis other taxpayers, section 90 of the Income-tax Act has been amended to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial." The provisions of Sections 4 and 5 of the Act are expressly made "subject to the provisions of this Act", which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income-tax Act and a Notification issued under Section 90, is no longer res-integra.
The Andhra Pradesh High Court in Commissioner of Income Tax v. Visakhapatnam Port Trust held that provisions of section 4 and 5 of Income-tax Act are expressly made 'subject to the provisions of the Act' which means that they are subject to provisions of section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any.
In Commissioner of Income Tax v. Davy Ashmore India Ltd. , while dealing with the correctness of a circular no.333 dated April 2, 1982, it was held that the conclusion is inescapable that in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. The Calcutta High Court expressly approved the correctness of the CBDT circular No.333 dated April 2, 1982 on the question as to what the assessing officers would have to do when they found that the provision of the Double Taxation was not in conformity with the Income-tax Act, 1961. The said circular provided as follows (quoted at p.632):
"The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.
Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e, the Income-tax Act, that will govern the taxation of income." The Calcutta High Court held that the circular reflected the correct legal position inasmuch as the convention or agreement is arrived at by the two Contracting States "in deviation from the general principles of taxation applicable to the Contracting States".
Otherwise, the double taxation avoidance agreement will have no meaning at all.
In Commissioner of Income Tax v. R.M. Muthaiah the Karnataka High Court was concerned with the DTAT between Government of India and Government of Malaysia. The High Court held that under the terms of agreement, if there was a recognition of the power of taxation with the Malaysian Government, by implication it takes away the corresponding power of the Indian Government. The Agreement was thus held to operate as a bar on the power of the Indian Government to tax and that the bar would operate on Sections 4 and 5 of the Income Tax Act, 1961, and take away the power of the Indian Government to levy tax on the income in respect of certain categories as referred to in certain Articles of the Agreement. The High Court summed up the situation by observing (at p.512-513):
"The effect of an "agreement" entered into by virtue of section 90 of the Act would be :
(1) If no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act;
(ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it;
(iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the court."
It also approved of the correctness of the Circular No. 333 dated April 2, 1982 issued by the Central Board of Direct Taxes on the subject.
In Arabian Express Line Ltd. of United Kingdom and Others v. Union of India the Gujarat High Court, interpreting section 90, in the light of circular No.333 dated April 2, 1982 issued by the CBDT, held that the procedure of assessing the income of a NRI because of his occasional activities in establishing business in India would not be applicable in a case where there is a convention between the Government of India and the foreign country as provided under Section 90 of the Income-tax Act, 1961. In case of such an agreement, section 90 would have an overriding effect.
Interestingly, in this case a certificate issued by the H.M. Inspector of Taxes certifying that the company was a resident of the United Kingdom for purposes of tax and that it had paid advance corporate tax in the office of the English Revenue Accounts Office, was held to be sufficient to take away the jurisdiction of the Income-tax Officer.
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 of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income 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 the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.
The contention of the respondents, which weighed with the High Court viz. that the impugned circular No.789 is inconsistent with the provisions of the Act, is a total non-sequitur. As we have pointed out, Circular No.789 is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section (2) of section 90. In other words, the circular shall prevail even if inconsistent with the provisions of Income-tax Act, 1961 insofar as assessees covered by the provisions of the DTAC are concerned.
Though a number of interconnected and diffused arguments were addressed, broadly the argument of the respondents appears to be as follows: By reason of Article 265 of the Constitution, no tax can be levied or collected except by authority of law. The authority to levy tax or grant exemption therefrom vests absolutely in the Parliament and no other body, howsoever high, can exercise such power. Once Parliament has enacted the Income-tax Act, taxes must be levied and collected in accordance therewith and no person has power to grant any exemption therefrom. The treaty making power under Article 73 is confined only to such matters as would not fall within the province of Article 265. With respect to fiscal treaties, the contention is that they cannot be enforced in contravention of the provisions of the Income-tax Act, unless Parliament has made an enabling law in support. The respondents highlighted the provisions of the OECD models with regard to tax treaties and how tax treaties were enunciated, signed and implemented in America, Britain and other countries. Placing reliance on the observations of Kier and Lawson , it was contended that in England it has been recognised that "there are, however, two limits to its capacity; it cannot legislate and it cannot tax without the concurrence of the Parliament". It is urged that the situation is the same in India; that unless there is a specific exemption granted by the Parliament, it is not open for the Central Government to grant any exemption from the tax payable under the Income-tax Act.
In our view, the contention is wholly misconceived.
Section 90, as we have already noticed (including its precursor under the 1922 Act), was brought on the statute book precisely to enable the executive to negotiate a DTAC and quickly implement it. Even accepting the contention of the respondents that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we are unable to see as to why a delegatee of legislative power in all cases has no power to grant exemption. There are provisions galore in statutes made by Parliament and State legislatures wherein the power of conditional or unconditional exemption from the provisions of the statutes are expressly delegated to the executive. For example, even in fiscal legislation like the Central Excise Act and Sales Tax Act, there are provisions for exemption from the levy of tax. Therefore we are unable to accept the contention that the delegate of a legislative power cannot exercise the power of exemption in a fiscal statute.
The niceties of the OECD model of tax treaties or the report of the Joint Parliamentary Committee on the State Market Scam and Matters Relating thereto, on which considerable time was spent by Mr. Jha, who appeared in person, need not detain us for too long, though we shall advert to them later. This Court is not concerned with the manner in which tax treaties are negotiated or enunciated; nor is it concerned with the wisdom of any particular treaty. Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other particular form, is none of our concern. Whether section 90 ought to have been placed on the statute book, is also not our concern. Section 90, which delegates powers to the Central Government, has not been challenged before us, and, therefore, we must proceed on the footing that the section is constitutionally valid. The challenge being only to the exercise of the power emanating from the section, we are of the view that section 90 enables the Central Government to enter into a DTAC with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAC is entitled to seek benefits thereunder, even if the provisions of the DTAC are inconsistent with the provisions of Income-tax Act, 1961.
STARE DECISIS
The learned Attorney General justifiably relied on the observations of this Court in Mishri Lal v. Dhirendra Nath (Dead) by Lrs. and Others in which this Court referred to its earlier decision in Muktul v. Manbhari on the scope of the doctrine of stare decisis with reference to Halsbury's Law of England and Corpus Juris Secundum, pointing out that a decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view. The learned Attorney General contended that the interpretation given to section 90 of the Income-tax Act, a Central Act, by several High Courts without dissent has been uniformally followed; several transactions have been entered into based upon the said exposition of the law; that several tax treaties have been entered into with different foreign Governments based upon this law, hence, the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora's box of uncertainty.
We think that this submission is sound and needs to be accepted. It is not possible for us to say that the judgments of the different High Courts noticed have been wrongly decided by reason of the arguments presented by the respondents. As observed in Mishrilal even if the High Courts have consistently taken an erroneous view, (though we do not say that the view is erroneous) it would be worthwhile to let the matter rest, since large numbers of parties have modulated their legal relationship based on this settled position of law.
Effect of circular under Section 119 Much of the argument centred around the effect of the circular issued by the CBDT under Section 119 of the Act and its binding nature.
Section 119, strategically placed in Chapter XIII which deals with 'Income-Tax Authorities' is an enabling power of the CBDT, which is recognised as an authority under the Income-tax Act under section 116(a). The CBDT under this section is empowered to issue such orders instructions and directions to other income-tax authorities "as it may deem fit for proper administration of this Act". Such authorities and all other persons employed in the execution of this Act are bound to observe and follow such orders, instructions and directions of the CBDT. The proviso to sub-section (1) of section 119 recognises two exceptions to this power. First, that the CBDT cannot require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner. Second, is with regard to interference with the discretion of the Commissioner (Appeals) in exercise of his appellate functions. Sub-section(2) of Section 119 provides for the exercise of power in certain special cases and enables the CBDT, if it considers it necessary or expedient so to do for the purpose of proper and efficient management of the work of assessment and collection of revenue, to issue general or special orders in respect of any class of incomes of class of cases , setting forth directions or instructions as to the guidelines, principles or procedures to be followed by other income-tax authorities in the discharge of their work relating to assessment or initiating proceedings for imposition of penalties. The powers of the CBDT are wide enough to enable it to grant relaxation from the provisions of several sections enumerated in clause (a). Such orders may be published in the Official Gazette in the prescribed manner, if the CBDT is of the opinion that it is so necessary. The only bar on the exercise of power is that it is not prejudicial to the assessee. We are not concerned with the provisions in clauses (b) and (c) in the present appeals.
In K.P. Varghese v. Income-Tax Officer, Ernakulam it was pointed out by this Court that not only are the circulars and instructions, issued by the CBDT in exercise of the power under section 119, binding on the authorities administering the tax department, but they are also clearly in the nature of contemporanea expositio furnishing legitimate aid to the construction of the Act.
The Rule of contemporanea expositio is that "administrative construction (i.e. contemporaneous construction placed by administrative or executive officers) generally should be clearly wrong before it is overturned; such a construction commonly referred to as practical construction, although non- controlling, is nevertheless entitled to considerable weight, it is highly persuasive." The validity of this principle was recognised in Baleshwar Bagarti v. Bhagirathi Dass where the Calcutta High Court stated the rule in the following words :
"It is a well-settled principle of interpretation that courts in construing a statute will give much weight to the interpretation put upon it, at the time of its enactment and since, by those whose duty it has been to construe, execute and apply it." The statement of this rule has also been quoted with approval by this Court in Deshbandhu Gupta & Company v. Delhi Stock Exchange Association Ltd .
In K.P. Varghese this Court held that the circulars of the CBDT issued in exercise of its power under section 119 are legally binding on the revenue and that this binding character attaches to the circulars "even if they be found not in accordance with the correct interpretation of sub-section (2) and they depart or deviate from such construction." Navnit Lal C. Javeri v. K.K.Sen and Ellerman Lines Ltd. v.CIT clearly establish the principle that circulars issued by the CBDT under section 119 of the Act are binding on all officers and employees employed in the execution of the Act, even if they deviate from the provisions of the Act.
In UCO Bank v. Commissioner of Incom-Tax , dealing with the legal status of such circulars, this Court observed:
"Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act.
Under section 119(2) however, the circulars as contemplated therein cannot be adverse to the assessee. Thus the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities." In Commissioner of Income-Tax v. Anjum M.H.Ghaswala and Others it was pointed out that the circulars issued by CBDT under Section 119 of the Act have statutory force and would be binding on every income-tax authority although such may not be the case with regard to press releases issue by the CBDT for information of the public.
In Collector of Central Excise Vadodra v. Dhiren Chemical Industries , this Court, interpreting the phrase 'appropriate', observed :
"We need to make it clear that, regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue." While commenting adversely upon the validity of the impugned circular, the High Court says "that the circular itself does not show that the same has been issued under Section 119 of the Income-tax Act. Only in a case where the circular is issued under Section 119 of the Income-tax Act, the same would be legally binding on the revenue. The circular does not deal with the power of the ITO to consider the question as to whether although apparently a company is incorporated in Mauritius but whether the company is also a resident of India and/or not a resident of Mauritius at all." It is trite law that as long as an authority has power, which is traceable to a source, the mere fact that source of power is not indicated in an instrument does not render the instrument invalid.
Is the impugned circular ultra-vires Section 119 ? It was contended successfully before the High Court that the circular is ultra vires the provisions of section 119. Sub-section(1) of section 119 is deliberately worded in general manner so that the CBDT is enabled to issue appropriate orders, instruction or direction to the subordinate authorities "as it may deem fit for the proper administration of the Act". As long as the circular emanates from the CBDT and contains orders, instructions or directions pertaining to proper administration of the Act, it is relatable to the source of power under section 119 irrespective of its nomenclature.
Apart from sub-section(1), sub-section(2) of section 119 also enables the CBDT "for the purpose of proper and efficient management of the work of assessment and collection of revenue, to issue appropriate orders, general or special in respect of any class of income or class of cases, setting forth directions or instructions (not being prejudicial to assessees) as to the guidelines, principles or procedures to be followed by other income tax authorities in the work relating to assessment or collection of revenue or the initiation of proceedings for the imposition of penalties". In our view, the High Court was not justified in reading the circular as not complying with the provisions of section 119. The circular falls well within the parameters of the powers exercisable by the CBDT under Section 119 of the Act.
The High Court persuaded itself to hold that the circular is ultra vires the powers of the CBDT on completely erroneous grounds. The impugned circular provides that whenever a certificate of residence is issued by the Mauritius Authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. It also provides that the test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13. This, the High Court thought amounts to issuing instructions "de hors the provisions of the Act".
In our view, this thinking of the High Court is erroneous.
The only restriction on the power of the CBDT is to prevent it from interfering with the course of assessment of any particular assessee or the discretion of the Commissioner of Income-Tax (Appeals). It would be useful to recall the background against which this circular was issued.
The Income-tax authorities were seeking to examine as to whether the assessees were actually residents of a third country on the basis of alleged control of management therefrom.
We have already extracted the relevant provisions of Article 4 which provide that, for the purposes of the agreement, the term 'resident of a contracting State' means any person who under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The term 'resident of India' and 'the resident of Mauritius' are to be construed accordingly. Article 13 of the DTAC lays down detailed rules with regard to taxation of capital gains. As far as capital gains resulting from alienation of shares are concerned, Article 13(4) provides that the gains derived by a 'resident' of a contracting State shall be taxable only in that State.
In the instant case, such capital gains derived by a resident of Mauritius shall be taxable only in Mauritius. Article 4, which we have already referred to, declares that the term resident of Mauritius' means any person who under the laws of Mauritius is 'liable to taxation' therein by reason, inter alia, of his residence.
Clause (2) of Article 4 enumerates detailed rules as to how the residential status of an individual resident in both contracting States has to be determined for the purposes of DTAC. Clause(3) of Article 4 provides that if, after application of the detailed rules provided in Article 4, it is found that a person other than an individual is a resident of both the contracting States, then it shall be deemed to be a resident of the contracting State in which its place of effective management is situated. The DTAC requires the test of 'place of effective management' to be applied only for the purposes of the tie-breaker clause in Article 4(3) which could be applied only when it is found that a person other than an individual is a resident both of India and Mauritius. We see no purpose or justification in the DTAC for application of this test in any other situation.
The High Court has held, and the respondents so contend, that the assessing officer under the Income-tax Act is entitled to lift the corporate veil, but the circular effectively bars the exercise of this quasi-judicial function by reason of a presumption with regard to the certificate issued by the competent authority in Mauritius;
conclusiveness of such a certificate of residence granted by the Mauritius tax authorities is neither contemplated under the DTAC, nor under the Income-tax Act a provision as to conclusiveness of a certificate is a matter of legislative action and cannot form the subject matter of a circular issued by a delegate of legislative power.
As early as on March 30, 1994, the CBDT had issued circular no.682 in which it had been emphasised that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act,1961 by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequtial matters, we think that the CBDT was justified in issuing 'appropriate' directions vide circular no.789, under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collection of revenue. The circular no.789 does not in any way crib, cabin or confine the powers of the assessing officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the DTAC.
We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No.789 dated 13.4.2000 is ultra vires the provisions of section 119 of the Act.
In our judgment, the powers conferred upon the CBDT by sub- sections (1) and (2) of Section 119 are wide enough to accommodate such a circular.
Is the DTAC bad for excessive delegation ? The respondents contend that a tax treaty entered into within the umbrella of section 90 of the Act is essentially delegated legislation; if it involves granting of exemption from tax, it would amount to delegation of legislative powers, which is bad. The legislature must declare the policy of the law and the legal principles which are to control any given case and must provide a procedure to execute the law.
The question whether a particular delegated legislation is in excess of the power of the supporting legislation conferred on the delegate, has to be determined with regard not only to specific provisions contained in the relevant statute conferring the power to make rule or regulation, but also the object and purpose of the Act as can be gathered from the various provisions of the enactment. It would be wholly wrong for the Court to substitute its own opinion as to what principle or policy would best serve the objects and purposes of the Act, nor is it open to the Court to sit in judgment of the wisdom, the effectiveness or otherwise of the policy, so as to declare a regulation to be ultra vires merely on the ground that, in the view of the Court, the impugned provision will not help to carry through the object and purposes of the Act. This court reiterated the legal position, well established by a long series of decisions, in Maharashtra State Board of Secondary and Higher Secondary Education and another v. Paritosh Bhupeshkumar Sheth and Others :
"So long as the body entrusted with the task of framing the rules or regulations acts within the scope of the authority conferred on it, in the sense that the rules or regulations made by it have a rational nexus with the object and purpose of the statute, the court should not concern itself with the wisdom or efficaciousness of such rules or regulations. It is exclusively within the province of the legislature and its delegate to determine, as a matter of policy, how the provisions of the statute can best be implemented and what measures, substantive as well as procedural would have to be incorporated in the rules or regulations for the efficacious achievement of the objects and purposes of the Act. It is not for the Court to examine the merits or demerits of such a policy because its scrutiny has to be limited to the question as to whether the impugned regulations fall within the scope of the regulation-making power conferred on the delegate by the statute." Applying this test, we are unable to hold that the impugned circular amounts to impermissible delegation of legislative power.
That the amendment made in section 90 was intended to empower the Government to enter into agreement with foreign Government, if necessary, for relief from or avoidance of double taxation, is also made clear by the Finance Minister in his Budget Speech, 1953-54 Is the Double Taxation Avoidance Convention 'DTAC') illegal and ultra vires the powers of the Central Government u/S 90 Although the High court has not made any finding of this nature, the respondents have strenuously contended before us that the Indo-Mauritius Double Taxation Avoidance Convention, 1983 is itself ultra vires the powers of the Government under Section 90 of the Act. This argument deserves short shrift.
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. We are not concerned with clauses (c) and (d).
There are two hurdles against accepting the arguments presented on behalf of the respondents. 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 objectives in clauses (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 delegated 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 an 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. We are, therefore, unable to accept the contention of the respondents that the DTAC is ultra vires the powers of the Central Government under Section 90 on account of its susceptibility to 'treaty shopping' on behalf of the residents of third countries.
The High Court seems to have heavily relied on an assessment order made by the assessing officer in the case of Cox and Kings Ltd. drawing inspiration therefrom. We are afraid that it was impermissible for the High Court to do so. An assessment made in the case of a particular assessee is liable to be challenged by the Revenue or by the assessee by the procedure available under the Act. In a Public Interest Litigation it would be most unfair to comment on the correctness of the assessment order made in the case of a particular assessee, especially when the assessee is not a party before the High Court. Any observation made by the Court would result in prejudice to one or the other party to the litigation.
For this reason, we refrain from making any observations about the correctness or otherwise of the assessment order made in Cox and Kings Ltd. Needless to say, we decline to draw inspiration therefrom, for our inspiration is drawn from principles of law as gathered from statutes and precedents.
What is "liable to taxation" Fiscal Residence The concept of 'fiscal residence' of a company assumes importance in the application and interpretation of double taxation avoidance treaties.
In Cahiers De Droit Fiscal International it is said that under the OECD and UNO Model Convention, 'fiscal residence' is a place where a person amongst others a corporation is subjected to unlimited fiscal liability and subjected to taxation for the worldwide profit of the resident company. At para 2.2 it is pointed out :
"The UNO Model Convention takes these two different concepts into account. It has not embodied the second sentence of article 4, paragraph 1 of the OECD Model Convention, which provides that the term 'resident' does not include any person who is liable to tax in that State in respect only of income from sources in that State. In fact, if one adhered to a strict interpretation of this text, there would be no resident in the meaning of the convention in those States that apply the principle of territoriality." Again in paragraph 3.5 it is said :
"The existence of a company from a company law standpoint is usually determined under the law of the State of incorporation or of the country where the real seat is located. On the other hand, the tax status of a corporation is determined under the law of each of the countries where it carries on business, be it as resident or non-resident." In paragraph 4.1 it is observed that the principle of universality of taxation i.e. the principle of worldwide taxation, has been adopted by a majority of States. One has to consider the worldwide income of a company to determine its taxable profit. In this system it is cr
