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2016 (4) TMI 593 - MADRAS HIGH COURT

2016 (4) TMI 593 - MADRAS HIGH COURT - [2016] 383 ITR 385 - Constitutional validity of Section 94-A(1) of the Income Tax Act, 1961 - validity of a Notification bearing No.86/2013 dated 1.11.2013 issued by the Central Government in exercise of the powers conferred under Section 94-A(1), specifying Cyprus as a notified jurisdictional area for the purposes of Section 94-A(1) - Held that:- We agree that from the point of view of linguistics, the words "sum" and "amount" are synonyms. But under the I .....

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any sum, income or amount, the Press Release is worded from the point of view of the person making the payment. When we speak from the point of view of the recipient of an amount, the word "payment" will not normally be used. The Press Release is not a legal document, but a note intended for the benefit of the common man. Therefore, the words and expressions used therein cannot be tested on the strength of Law Lexicons.

Moreover, as rightly pointed out by Mr.T.Pramod Kumar Chopda, lea .....

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warrants and covenants that the First Tranche Securities are being transferred hereunder at a loss and, thus, there is no obligation on the Buyers to withhold any Tax on the First Tranche Consideration being remitted to Skyngelor for the transfer of the First Tranche Securities. If despite such representation, any tax should be levied, the same shall be borne and paid by Skyngelor."

The above Clause in the Securities Purchase Agreement, exposes the frivolity of the contentions of the .....

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d fault with the statutory prescription and with the Notification and Press Release.

Therefore, we are of the considered view that the challenges to Section 94-A (1), the Notification dated 1.11.2013 and the Press Release dated 1.11.2013 are not sustainable in law.

The ordinary dictionary meaning of the word "haven"is "harbour or anchorage". By extension, the word also denotes a place of safety, a refuge or sanctuary. In association with the word "tax", the word "haven" has .....

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R. T.MATHIVANAN, JJ. For The Petitioners : Mr.Arvind P.Datar, SC for Mr.P.Giridharan For The Respondents :Mr.Pramod Kumar Chopda Standing Counsel COMMON ORDER V.RAMASUBRAMANIAN,J Three persons have come up with these nine writ petitions, challenging respectively (i) the Constitutional validity of Section 94-A(1) of the Income Tax Act, 1961 (ii) the validity of a Notification bearing No.86/2013 dated 1.11.2013 issued by the Central Government in exercise of the powers conferred under Section 94-A .....

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ing the validity of the Notification bearing No.86/2013 and three writ petitions challenging the press release, we deem it fit to extract Section 94-A in entirety, the Notification dated 1.11.2013 as well as the press release in entirety before we proceed to consider the grounds of challenge. 4. Section 94-A of the Income Tax Act reads thus : 94-A. Special measures in respect of transactions with persons located in notified jurisdictional area.- (1) The Central Government may, having regard to t .....

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nsaction shall be deemed to be associated enterprises within the meaning of Section 92A; (ii) any transaction in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, income, losses or assets of the assessee including a mutual Agreement or Arrangement for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connect .....

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nal area shall be allowed under this Act, unless the assessee furnishes an authorisation in the prescribed form authorising the Board or any other income-tax authority acting on its behalf to seek relevant information from the said financial institution on behalf of such assessee; and (b) in respect of any other expenditure or allowance (including depreciation) arising from the transaction with a person located in a notified jurisdictional area shall be allowed under any other provision of this .....

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e beneficial owner of the said sum) or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory, then, such sum shall be deemed to be the income of the assessee for that previous year. (5) Notwithstanding anything contained in any other provisions of this Act, where any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the hi .....

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n Sub-Clause (a) or Sub-Clause (b), in the notified jurisdictional area; (ii) "permanent establishment" shall have the same meaning as defined in Clause (iiia) of Section 92F." 5. The Notification dated 1.11.2013 reads as follows : "Ministry of Finance (Department of Revenue) (Central Board of Direct Taxes) Notification New Delhi the 1st November 2013 No.86/2013 [Income Tax] S.O.3307(E) - In exercise of the Powers conferred by Sub-Section (1) of Section 94-A of the Income Tax .....

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he Income-Tax Act,1961 ; All Parties to the Transaction with a Person in Cyprus shall be treated as Associated Enterprises and the Transaction shall be treated as an International Transaction Resulting in Application of Transfer-Pricing Regulations Including Maintenance of Documentations Section 94-A was introduced in the Income-tax Act, 1961, through the Finance Act, 2011, in respect of transactions with persons located in notified jurisdictional area as an anti-avoidance measure. As per Sectio .....

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into an Agreement for avoidance of double taxation of income and prevention of fiscal evasion which is in force since 21st December, 1994. Both the Contracting States under this Agreement have a legal obligation to exchange such information as is necessary for carrying out the provisions of the Agreement or of domestic laws of the Contracting States, in particular for the prevention of fraud or evasion of taxes. Since Cyprus has not been providing the information requested by the Indian tax auth .....

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ed enterprises and the transaction shall be treated as an international transaction resulting in application of transfer-pricing regulations including maintenance of documentations [Section 94-A(2)]. - No deduction in respect of any payment made to any financial institution in Cyrus shall be allowed unless the assessee furnishes an authorization allowing for seeking relevant information from the said financial institution [Section 94-A(3)(a) read with Rule 21AC and Form 10FC]. - No deduction in .....

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l be deemed to be the income of the assessee [Section 94-A(4)]. - Any payment made to a person located in Cyprus shall be liable for withholding tax at 30 per cent or a rate prescribed in Act, whichever is higher [Section 94-A(5)]." Why this challenge by the petitioners: 7. Before we look into the grounds of challenge to the statutory provision, the Notification and the press release, a little background may be essential to understand why this challenge. 8. It appears that a tripartite Agre .....

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imited, agreed and undertook to sell all those shares and debentures to the writ petitioners herein. Under Clause 3 of the Agreement, the payment of the purchase consideration was agreed to be done in 4 tranches, in the following manner : (i) In the first tranche, an amount of INR 14,63,97,888 was to be paid by the buyers to the Cyprus company on the first closing date, towards the purchase of 15,200 equity shares and 17,86,000 debentures (ii) In the second tranche, an amount of INR 99,99,990 wa .....

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hs of the execution of the aforesaid Securities Purchase Agreement, the petitioners received independent but identical show cause notices dated 29.1.2015, inviting their attention to Section 94-A(1) of the Income Tax Act, 1961 and the Notification No.86/2013 dated 1.11.2013 and calling upon them to show cause as to why each one of them should not be treated as an assessee in default, warranting the initiation of proceedings under Section 201(1)/201(1A) of the Income Tax Act. 10. In response to t .....

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195. The petitioners claimed that they had in fact purchased the securities at a rate below their face value and that the Cyprus company had in fact suffered a loss. 12. But, overruling the objections, the Income Tax Officer passed three separate orders dated 27.4.2015 under Section 201(1)/201(1A), directing the petitioners to pay tax and interest, as determined. A notice of demand under Section 156 was also issued. 13. It appears that the petitioners immediately filed statutory appeals under S .....

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challenging the demand notices and the orders passed under Section 201(1)/201(1A). It is stated across the bar that a learned Judge has ordered notices in those three writ petitions, but there is no interim order of protection. 15. Keeping this screenplay in mind, let us now consider the grounds of challenge. A. Grounds of challenge to the Constitutional validity of Section 94-A: 16. The petitioners challenge Section 94-A(1), on the short ground that it has conferred sweeping powers upon the Cen .....

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ne another. The Treaty entered into by the Government is virtually a law under Article 253 of The Constitution and hence, neither the Parliament can make any law that would go contrary to the Treaty nor the Government can take any executive action to annul the effect of the Treaty so long as the Treaty is in force. 17. It is contended by Mr.Arvind P.Datar, learned Senior Counsel for the petitioners that the power of the Parliament to make laws conferred under Article 245(1), is made subject the .....

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with respect to Taxes on Income and on Capital', with the Republic of Cyprus in December 1994. The Agreement entered into force on 21.12.1994 and the Central Government also issued a notification bearing No.G.S.R. 805(E) dated 26.12.1995 in exercise of the powers conferred by Section 90 of the Income Tax Act, 1961. The Agreement also contains a provision in Article 28 for 'Exchange of Information' and a provision in Article 27 prescribing a 'Mutual Agreement Procedure' to ad .....

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under Article 245(1) is subordinate to the power under Article 253. 20. In other words, the contention of Mr.Arvind P.Datar, learned Senior Counsel appearing for the petitioners is that Section 94-A(1), in as much as it confers a power upon the Central Government to specify by notification, any country as a notified jurisdictional area, without reference to the existence of a Treaty with that country, is violative of Articles 14, 19(1)(g), 51, 245, 253 and 269 of The Constitution. 21. Placing st .....

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ng to the petitioners, since India has entered into a Double Taxation Avoidance Agreement (hereinafter referred to as DTAA for the purpose of brevity) with the Republic of Cyprus and also since the said Agreement includes a provision for exchange of information and the Agreement is also notified under Section 90, the power conferred upon the Central Government by Section 94-A(1) to specify any country as a notified jurisdictional area, is clearly unconstitutional and also suffers from the vice o .....

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ligations. It is also true that under Article 245(1), the Parliament is empowered to make laws for the whole or any part of the territory of India and the Legislature of a State is empowered to make laws for the whole or any part of the State, subject to the provisions of The Constitution. This is primarily due to the fact that the legislative powers are distributed between the Parliament and the State Legislatures, in terms of Lists I, II and III of the 7th Schedule. 26. The scheme of Chapter I .....

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gislature would have power to make laws with respect to any of the matters enumerated in List III. (iv) The Legislature of a State will have the exclusive power to make laws for the State, with respect to any of the matters enumerated in List II. (v) The Parliament would also have the power to legislate with respect to a matter enumerated in the State List, subject to the fulfillment of certain conditions stipulated in Article 249. The Parliament would have a similar power whenever a Proclamatio .....

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conference, association or other body." 28. As could be seen from the language employed, Article 253 is an enabling provision that empowers the Parliament to make any law for the whole or any part of the territory of the country for implementing any Treaty, Agreement or Convention with any other country. It is true that the power conferred upon the Parliament under Article 253 is 'notwithstanding anything contained in the foregoing provisions of this Chapter'. 29. But, the effect of .....

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f inconsistencies relate to the law made by the Parliament vis-a-vis the law made by the State Legislature. 30. Neither Chapter I of Part XI nor any other provision of The Constitution deals with an inconsistency either between two sets of laws made by the Parliament itself or between a bilateral or international Treaty or Convention on the one hand and a law made by the Parliament on the other hand. This is due to the fact that a Treaty entered into by the country with another country is actual .....

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ament has power to make laws; and (b) to the exercise of such rights, authority and jurisdiction as are exercisable by the Government of India by virtue of any Treaty or Agreement: Provided that the executive power referred to in Sub-Clause (a) shall not, save as expressly provided in this Constitution or in any law made by Parliament, extend in any State to matters with respect to which the Legislature of the State has also power to make laws. 31. The law making power of the Parliament in relat .....

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es and Agreements with foreign countries and implementing of Treaties, Agreements and Conventions with foreign countries'. 32. Hence, Article 253 of The Constitution, empowering the Parliament to make any law for implementing any Treaty, Agreement or Convention with another country or countries or any decision made at in international conference, association or other body, has to be read in conjunction with Entries 10, 12, 13 and 14 of List 1 of the 7th Schedule. 33. As we have already seen, .....

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to law making power, Clause (b) relates to the exercise of rights under any Treaty or Agreement. 34. The extent of executive power of the Union, recognized by Sub-Clauses (a) and (b) of Clause (1) of Article 73, is actually vested in the President by virtue of Article 53(1). Article 53(1) states that the executive power of the Union shall be vested in the President and shall be exercised by him either directly or through officers subordinate to him in accordance with The Constitution. Therefore .....

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35. Until perhaps the advent of the liberalisation regime, the courts were confronted only with one type of Treaties namely those of the United Nations Organisation, ratified by India. It was perhaps after the advent of liberalisation and after India became a Member of the World Trade Organisation, obliging it to enter into one-to-one Treaties with one or more countries, that a fine distinction came to be drawn between (i) international Conventions or Treaties generally ratified by India and (i .....

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that has developed on the question of enforcement of the rights arising out of Conventions or Treaties ratified by India. 37. In Jolly George Varghese Vs. The Bank of Cochin [AIR 1980 SC 470], the Supreme Court held that the executive power of the Government of India to enter into international Treaties does not mean that international law, ipso facto, is enforceable upon ratification. The Supreme Court observed that the Indian Constitution followed the 'dualistic' doctrine with respect .....

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IES OF INTERNATIONAL LAW 38. Since the Supreme Court observed in Jolly George Varghese that India followed the dualistic doctrine, it may be necessary, before we proceed further to know that like the Philosophical Concepts of Dvaitha (dualism) and Advaitha (monism), the principles of international law also contain two theories namely (i) monism and (ii) dualism. Monism is the idea that assumes that international law and national law are nothing but two components of a single legal system or body .....

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argue that the rule of international law apply within a State only as a result of their adoption by the local law of the State. In other words, the principles of international law apply not as such, but as part of the municipal law. The chief exponents of dualism namely Treipel and Anzilotti opine that there are two essential distinctions between the national and international law. They are (i) the subjects of national law are individuals, while the subjects of international law are the States a .....

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ipal laws of the State. 41. The position taken by the Supreme Court in Jolly George Varghese was not wholly new. In Kesavanandhabharathi Vs. State of Kerala [1973 Supp. SCR 1], Sikri,C.J., stated: "It seems to me that in view of Article 51 of the Directive Principles, this Court must interpret the Constitution, if not intractable, which is after all, an intractable law, in the light of the United Nations Charter and the solemn declaration subscribed to by India." In A.D.M., Jabalpur Vs .....

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But, the Supreme Court pointed out that such international Conventions contained the unified rules of law drawn from different legal systems and that they embody the principles of law recognized by States. As a consequence, those Conventions were held by the Supreme Court to be regarded as part of the common law. Nevertheless, the Supreme Court pointed out that a specialised body of legal and technical experts should facilitate adoption of internationally unified rules by national legislation. .....

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itate international trade. Although these Conventions have not been adopted by legislation, the principles incorporated in the Conventions are themselves derived from the common law of nations as embodying the felt necessities of international trade and are as such part of the common law of India and applicable for the enforcement of maritime claims against foreign ships." 43. But, the Supreme Court was able to apply the principles behind those international Conventions, in M.V.Elizabeth, o .....

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itizens Welfare Forum Vs. Union of India [AIR 1996 SC 2715] that "the rules of Customary International Law, which are not contrary to the municipal law shall be deemed to have been incorporated in the domestic law and shall be followed by the courts of law." 45. In Vishaka Vs. State of Rajasthan [AIR 1997 SC 3011], the Supreme Court looked into the Convention for Elimination of Discrimination against Women (CEDAW) to deal with issues relating to sexual harassment of women in work place .....

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fundamental rights and in harmony with its spirit must be read into those provisions to enlarge the meaning and content thereof to promote the object of the Constitutional guarantee." 46. In Pratap Singh Vs. State of Jharkhand [2005 (3) SCC 551], the Supreme Court reiterated that "the Courts can refer to and follow international Treaties, Covenants and Conventions, to which, India is a party, although they may not be part of our municipal law." In this case, the Court held that t .....

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l not be breached as a result. The Court also held that in case of any inconsistency, the domestic legislation will prevail. The Court evolved six different purposes for which, it could make use of the international law. They are (i) as a means of interpretation (ii) justification or fortification of a stance taken (iii) to fulfill the spirit of international obligations, which India has entered into, when they are not in conflict with the existing domestic law (iv) to reflect international chan .....

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ch, India is not a party, can be looked into, if the principles upon which, such Conventions or Treaties are founded, could be traced to the common law (as held in M.V.Elizabeth). Decision in Azadi Bachao Andolan 49. Despite the fact that in the past 65 years after the adoption of The Constitution, the Supreme Court has been consistent in the application of the principles enunciated in the preceding paragraph, a slight deviation from the beaten track appears to have emerged in Union of India Vs. .....

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tion 90 of the Income Tax Act read with Section 24A of the Companies (Profits) Surtax Act, 1964. 51. In accordance with the said Agreement and in exercise of the powers conferred under Section 90 of the Income Tax Act, the Central Board of Direct Taxes issued a circular bearing No.682 dated 30.3.1994 clarifying that capital gains of any resident of Mauritius by alienation of shares of an Indian company shall be taxable only in Mauritius according to the tax laws of that country. This resulted in .....

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s to issue a clarificatory circular bearing No.789 dated 13.4.2000. 52. The above circular was challenged before the High Court of Delhi, by a non governmental organisation by name Azadi Bachao Andolan, by way of a public interest litigation. In a second writ petition, they also prayed among other things, for declaring and delimiting the powers of the Central Government under Section 90 of the Income Tax Act, in the matter of entering into an Agreement with the Government of any country outside .....

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ion 90, however bona fide it is, would be ultra vires the provisions of the Act and (iii) that though political expediency may have a role to play in terms of Article 75 of The Constitution, the same is not true when a Treaty is entered into under a statutory provision such as Section 90 of the Income Tax Act. 54. When the matter was taken to the Supreme Court by the Union of India, the Supreme Court analysed the Constitutional provisions that deal with the power of the Executive to enter into T .....

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nto an International Treaty in times either of war or peace." Having said that, the Court also added in paragraph 18 that "the obligations arising under the Agreement or Treaties are not by their own force, binding upon Indian nationals." 55. In Azadi Bachao Andolan, the Supreme Court made a distinction between two types of Treaties, one requiring legislation and another not requiring legislation, so as to have a binding force. The relevant portion of paragraph 18 of the decision .....

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." 56. In other words, the Court opined that Treaties could be of two types, one restricting the rights of citizens or modifying the law of the State and the other not affecting the rights of citizens. Treaties, which fall under the first type, require legislation, to have binding force upon the citizens and those, which fall under the second type, do not require any legislation. 57. Having identified two types of Treaties and the essential difference between them, the Supreme Court held in .....

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ming and cumbersome, a special procedure was evolved by enacting Section 90 of the Income Tax Act. 58. But, the difficulty in reconciling the opinion contained in paragraph 18 with the opinion contained in paragraph 19 of the report in Azadi Bachao Andolan is that if no legislative measure is needed to give effect to a Treaty that does not affect the rights of citizens or others (as indicated in paragraph 18), then a Treaty entered into by India, need not always be translated into an Act of Parl .....

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aw in force in that country had been paid. After Independence, the 1922 Act was replaced by the Income Tax Act, 1961 and Section 90 was incorporated in the new Act, as a reproduction of Section 49A of the 1922 Act. The Finance Act, 1972 modified Section 90 and brought it into force with effect from 1972. The object and scope of the new provision was to empower the Central Government to enter into an agreement with foreign countries, not only for the purpose of avoidance of double taxation of inc .....

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ect 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 b .....

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Andolan, the Supreme Court indicated that the provisions of Sections 4 and 5 of the Income Tax Act, are expressly made subject to the provisions of the Act. As a consequence, they are subject to Section 90 and by necessary implication, they are also subject to the terms of Double Taxation Avoidance Agreement. After having pointed out the same, the Supreme Court held in paragraphs 28 and 29 as follows : "A survey of the aforesaid cases makes it clear that the judicial consensus in India has .....

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arture 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 t .....

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equences 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 in so far as assessees covered by the provisions of the DTAC are concerned." 62. The observations made by the Supreme Court in paragraphs 28 and 29 of its decision in Azadi Bachao Andolan are obviously the sheet anchor of the case of the writ petitioners. Since the Supreme Court pointed out therein that Section 90 is specifically .....

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er Section 90. 63. For testing the correctness of the above contention, let us take a look at Section 90 of the Income Tax Act. It reads as follows : "90. (1) The Central Government may enter into an Agreement with the Government of any country outside India or specified territory 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 specified territory, as the case may be, or (ii) in .....

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responding law in force in that country or specified territory, as the case may be, 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 or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the Agreement. (2) Where the Central Government has entered into an Agreement with the Government of a .....

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are not beneficial to him." 64. It may be noted that Sub-Section (2A) was inserted under the Finance Act, 2012 with effect from 1.4.2013, but was omitted by Finance Act, 2013, due to the controversies it created. However, there was a proposal to implement it with effect from 1.4.2016. 65. But, a careful look at Section 90 would show that the interpretation given to the same by the Supreme Court in Azadi Bachao Andolan, cannot be taken advantage of by the petitioners. The scheme of Section .....

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e recovery of income tax. (ii) Sub-Section (2) of Section 90 confers a benefit upon the assessee, in relation to whom, an agreement of the nature indicated in Sub-Section (1) has been entered into, would apply. The benefit so conferred is that the provisions of the Income Tax Act would apply to such an assessee, to the extent they are more beneficial to him. 66. Thus, Sub-Section (1) of Section 90 is an enabling provision, that empowers the Central Government to enter into an agreement in the na .....

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ither expressly or by necessary implication, that the law made by Parliament would stand eclipsed or excluded, to the extent it is inconsistent with the terms of the Agreement. 68. As a matter of fact, the observation made by the Supreme Court in paragraph 28 (shown by us in bold letters in the extract given in para 61 above) that 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, can .....

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ts attention to what is more beneficial to the assessee. If the provisions of the Income Tax Act are more beneficial to the assessee, to whom an agreement of the nature specified in Section 90(1) applies, those provisions would apply to him. If an option is given to choose between two alternatives, it cannot be said that one alternative is inconsistent with the other. Section 90(2) merely speaks about two options, one of which is more beneficial than the other to the assessee. This provision doe .....

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powers. While Section 90(1) deals with the delegation of power to enter into an agreement, Section 94A(1) deals with the delegation of power to specify a country as a notified jurisdictional area. Therefore, even if a conflict is imagined to be in existence, it is not between a Treaty on the one hand and a Municipal Law on the other hand as sought to be projected on behalf of the petitioners. It could, at the most, be a conflict between the manner in which, the delegated power conferred under o .....

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aty, which has not been translated into legislation in terms of Article 253 of The Constitution, is binding on the municipal courts. The second view is that of Alexandrowicz, according to whom, only those Treaties affecting private rights, require legislation to become enforceable. 73. The followers of Alexandrowicz propound that the following Treaties may have to be translated into legislation, so as to have binding force : "(a) Treaties involving cession of territory; (b) Treaties, whose .....

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the Executive cannot act contrary to the provisions of the law or cause prejudice to a person except by some legislative authority." 74. It is needless to point out that the Executive cannot acquire new rights against citizens merely by concluding Treaties. No new offences can be created merely by concluding a Treaty, without statutory sanction. Though few jurists are of the opinion that the views of Alexandrowicz has come to prevail over the views of Basu, there is no unanimity of opinion. .....

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d out that "a Treaty entered into by India cannot become law of the land and it cannot be implemented unless Parliament passes a law as required under Article 253." The Supreme Court also drew a distinction in paragraph 494 of the report in Kesoram between the interpretation of a legislation in conformity with international principles and the giving effect to of a Treaty provision in the absence of Municipal Laws. 76. Once it is stated that India has followed the dualistic model and on .....

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upreme. The collective will and the collective conscience of the people, which the Parliament is supposed to reflect, cannot be subordinated to the power of the Executive. 77. It is true that the principles enunciated in Azadi Bachao Andolan, were reiterated by the Supreme Court in CIT Vs. P.V.A.L.Kulandagan Chettiar [2004 (6) SCC 235]. In paragraphs 6 and 7 of the said decision, the Supreme Court pointed out that the traditional view with regard to the concept of double taxation, underwent a co .....

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ther avoiding the liability. 78. There cannot be a quarrel with the proposition of law laid down in paragraph 8 of Kulandagan Chettiar. But, as we have indicated earlier, Section 90(2) does not deal with the question of conflict between a Treaty and the provisions of a statute. It merely deals with the option given to an assessee, to whom an agreement referred to in Section 90(1) applies, to choose either the provisions of the Treaty or the provisions of the Act, whichever is more beneficial to .....

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a matter covered by a Treaty. 80. It will be useful at this juncture to quote what the "National Commission to Review the Working of the Constitution" said about the role of the Judiciary, when it comes to the question of interpretation of Treaties : "Judiciary has no specific role in Treaty making as such, but if and when a question arises whether a Treaty concluded by the Union violates any of the Constitutional provisions, Judiciary come into the picture. It needs no emphasis .....

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nt to make a law. They are (i) that such a law cannot infringe any of the Fundamental Rights or erode the basic structure of the Constitution and (ii) that it must be within its legislative competence. To say that there is one more limitation on the power of the Parliament, in the form of a Treaty entered into by the Executive, is to recognise a limitation not imposed by the Constitution. 82. In Magan Bhai Patel Vs. Union of India [AIR 1969 SC 783], the Supreme Court pointed out that whenever a .....

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entitled to make a law by itself, to delegate the said power to the Executive, so that the Executive can enter into an agreement, that would confer certain benefits upon persons to whom such an agreement would apply. Therefore, the contention that the Parliamentary law would give way to a Treaty, goes contrary to the Constitutional scheme. 84. In Tractor Export Vs. Tarapore & Co. [AIR 1970 SC 1168], the Supreme Court pointed out that if the terms of the legislative enactment do not suffer f .....

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d as follows : "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 T .....

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perform them and so, leave the State in default." Argument based on Vienna Convention : 86. The Vienna Convention on the Law of Treaties, which entered into force on 27.1.1980, obliges the Member States to treat every Treaty in force, as binding upon the parties thereto. Articles 26 and 27 of the Vienna Convention contain the doctrine of 'Pacta Sunt Servanda'. It lays down that every Treaty in force is binding upon the parties to it and must be performed in good faith and a party ma .....

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ethmalani Vs. Union of India [2011 (8) SCC 1], the Supreme Court referred to Article 31 of the Vienna Convention and pointed out that though India is not a party to the Convention, it contains many principles of customary international law. Since the principles of customary international law, could always be invoked, the Courts have drawn inspiration from the said Convention, whenever it was necessitated. 88. But, even if we invoke the rule of Pacta Sunt Servanda contained in Article 26 of the V .....

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rovide necessary information, then such a party is in breach of the obligation under Article 26 of the Vienna Convention. The beneficiary of such a breach of obligation by one of the contracting parties (like the assessee herein) cannot invoke the Vienna Convention to prevent the other contracting party (India in this case) from taking recourse to internal law, to address the issue. 89. It will be of interest to note that in Ram Jethmalani, the Supreme Court took note of the Vienna Convention as .....

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90(1). 90. Therefore, we are of the considered view that the challenge to the Constitutional validity of Section 94A(1) is without any merit. The argument that Section 90(1)(c) cannot be diluted by Section 94A(1) overlooks the fundamental fact that if the purpose of the Central Government entering into an agreement under Section 90(1) is defeated by the lack of effective exchange of information, then Section 90(1)(c) is actually diluted by one of the contracting parties and not by Section 94A(1 .....

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ssity to incorporate a non obstante clause in Sub-Section (1) of Section 94A. 91. Before we wind up our discussion on the challenge to Section 94A, we should point out the circumstances stated by the Union of India in paragraph 10 of the counter affidavit filed by them, which triggered the insertion of Section 94A. It appears that many countries suffered evasion or avoidance of tax, by unscrupulous persons exploiting noble theories of public international law. Therefore, certain resolutions were .....

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in together to resolve. A global crisis requires a global solution. 3. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today s population, but of future generations too. We believe that the onl .....

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; . promote global trade and investment and reject protectionism, to underpin prosperity; and . build an inclusive, green, and sustainable recovery. By acting together to fulfil these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future. 5. The Agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional len .....

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nd concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth. 7. Our central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have ple .....

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. We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector. 9. Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times. Acting together stren .....

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store growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth. We commit today to taking whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly the actions taken and the global actions required. 11. We are resolved to ensure long-term fiscal sustainability and price stability and will put in place credible exit strategies from the measures that need to be taken now to support the financial sector and r .....

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and in the future, to candid, even-handed, and independent IMF surveillance of our economies and financial sectors, of the impact of our policies on others, and of risks facing the global economy. Strengthening financial supervision and regulation: 13. Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more .....

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n must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innova .....

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ith the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them; . to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks; . to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds; . to endorse and implement the FSF s tough new principles on pay and c .....

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public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by Global Forum against the international standard for exchange of tax information. . to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high quality global accounting standards; and . to extend regulatory oversight and registration .....

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November." 92. The portion of the above statement, highlighted in bold letters, would show that there was sufficient justification for the Parliament to insert Section 94A. In doing so, the Parliament did not show disrespect to any Treaty. The resolution passed by the G20 Nations, to take action against non cooperative jurisdictions, including tax havens, is what is sought to be given effect to, by the insertion of Section 94A. 93. The above position can be cross verified from the relevant .....

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exchange information with India, a set of anti-avoidance measures have been provided. A new Section 94-A has been inserted in the Act to specifically apply to transactions undertaken with persons located in such country or area. The section provides- (i) an enabling power to the Central Government to notify any country or territory outside India. having regard to the lack of effective exchange of information by it with India, as a notified jurisdictional area; (ii) that if an assessee enters int .....

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in the prescribed form, authorizing the Board or any other Income-tax authority acting on its behalf, to seek relevant information from the said financial institution; (iv) that no deduction in respect of any other expenditure or allowance (including depreciation) arising from the transaction with a person located in a notified jurisdictional area shall be allowed under any provision of the Act unless the assessee maintains such other documents and furnishes the information as may be prescribed .....

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ion of the Act or rate or rates in force or a rate of 30 per cent. Applicability - These amendments have been made effective from 1st June, 2011." Therefore, in the light of the foregoing, we find no merit in the challenge to the Constitutional validity of Section 94A(1). 94. The circumstances leading to the enactment of Section 94-A, are explained in paragraph 29 of the counter affidavit filed on behalf of the Union of India. It is indicated in the said paragraph that India is not the only .....

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ensive measures' as contemplated under sec.94A is resounded not just in India but in many other nations as such a few of the same are tabulated below: Sl. No. Country Measures 1 Argentina Legislative 1. The current taxation of domestic shareholders on (certain) income of a controlled foreign company. 2. Disallowing deductions or credits with respect to certain transactions. 3. Special withholding tax rules. 4. The application of transfer pricing rules to transactions between related parties/ .....

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1. Disallowing deductions or credits with respect to certain transactions. 2. Increased information reporting requirements. Non legislative 3. Increased audit risk for tax payers who engage in transactions with certain "high risk" jurisdictions. 4. Increased substantial requirements in respect of transactions involving certain jurisdictions. 4 Brazil Legislative 1. Disallowing deductions or credits with respect to certain transactions. 2. Special withholding tax rules. 5 Colombia Legi .....

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iction. 6 Czech Republic Legislative 1. Special withholding tax rules. 7 Denmark Legislative 1. The current taxation of domestic shareholders on (certain) income of a controlled foreign company. 2. The denial of benefits on income/capital gains associated with shares in certain companies. 3. Disallowing deductions or credits with respect to certain transactions. Non-legislative 4. Increased audit risk for tax payers who engage in transactions with certain "high risk" jurisdictions. 8 F .....

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ons. 9 Germany Legislative 1. The denial of benefits on income/capital gains associated with shares in certain companies. 2. Disallowing deductions or credits with respect to certain transactions. 3. Increased information reporting requirements. Non-legislative 1. Increased substantial requirements in respect of transactions involving certain jurisdictions. 10 Italy Legislative 1. The current taxation of domestic shareholders on (certain) income of a controlled foreign company. 2. The denial of .....

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Italy. Specific measures in relation to associated companies with a registered office in blacklisted jurisdiction. Specific measures in relation to individuals with undeclared financial activities in a blacklisted jurisdiction. 11 Netherlands Legislative 1. The denial of benefits on income/capital gains associated with shares in certain companies. Non legislative 2. Additional question(s) on tax returns to the ownership of foreign assets. 12 Norway Legislative 1. Special withholding tax rules 2 .....

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of transfer pricing rules to transactions between related parties/increased transfer pricing documentation requirements. 5. Increased information reporting requirements. Non-legislative 6. Additional question(s) on tax returns as to the ownership of foreign assets. 7. Increased substantial requirements in respect of transactions involving certain jurisdiction. 14 Spain Legislative 1. The current taxation of domestic shareholders on (certain) income of a controlled foreign company. 2. The denial .....

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legislative 2. Increased substantial requirements in respect of transactions involving certain jurisdictions. The above list is merely illustrative and not exhaustive. For instance, in Finance defensive measures were applied to jurisdictions categorized as 'non-cooperative' i.e., British Virgin Islands, Jersey & Bermuda resulting in taxation of domestic shareholders on certain income of controlled foreign company, denial of benefits of income/capital gains associated with shares in c .....

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ad also notified (blacklisted) Cyprus and in view of the above, Cyprus has started cooperating with those countries for exchange of information. Due to positive development on the part of Cyprus, Spain & Russia have subsequently withdrawn their notification in 2012 & 2015 respectively. Therefore, these are a few examples which show the resolve of the transparent countries to take action against those who promote tax evasion by not providing the requisite tax information." 95. Theref .....

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s have also challenged the Notification No.86 dated 1.11.2013. This Notification reads as follows : "S.O.3307 (E).-In exercise of the powers conferred by Sub-Section (1) of Section 94A of the Income Tax Act, 1961 (43 of 1961), the Central Government hereby specifies 'Cyprus' as the 'notified jurisdictional area' for the purposes of the said Section." 97. The first ground of challenge to the above Notification is that it is ultra vires Section 94A(1). 98. But, we have al .....

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for any doubt that the Central Government has the power to issue a Notification, of the type impugned in these writ petitions. The power conferred by the Section cannot also be said to be uncontrolled and unbridled, as the Central Government has to exercise the power only in circumstances where there is lack of effective exchange of information. 100. In paragraph 9 of the counter affidavit filed on behalf of the Union of India, it is stated that the provisions of DTAA entered into by India with .....

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nto India from Cyprus represent the unaccounted money of Indian nationals and hence, to check tax evasion, a number of requests on specific cases was made to Cyprus. In spite of the existence of DTAA, no information sought for was forthcoming from Cyprus, which prompted the impugned Notification...." 101. As we have pointed out earlier, both contracting parties are obliged to perform their obligations under the Treaty in good faith. When one of the parties commits a default by failing to pr .....

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xes covered by the Agreement, insofar as the taxation thereunder is not contrary to the Agreement, in particular for the prevention of fraud or evasion of such taxes. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in .....

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f information regarding tax avoidance. 2. The exchange of information or documents shall be either on a routine basis or on request with reference to particular cases or both. The competent authorities of the Contracting States shall agree from time to time on the list of the information or documents which shall be furnished on a routine basis. 3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative mea .....

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3. On the basis of para 3(b) of Article 28, it was contended that certain types of information are excluded from the purview of Article 28 and that therefore, the said provision cannot be annulled by a statutory provision and a Notification issued thereunder. 104. But, we do not think that the lack of exchange of information by Cyprus, which led to the Notification dated 1.11.2013 would fall under any of the two categories indicated in para 3(b) of Article 28 of the DTAA. The information relatin .....

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he 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." 106. On the basis of the above paragraph, it is contended by Mr.Arvind P.Datar, learned Senior Counsel that when the DTAA itself provides a procedure for dispute resolution, the Government of India could not have taken recourse to Section 94A(1). 107. But, we are unable to sustain the above contention. Paragraph 3 of Article 27 .....

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appearing for the petitioners contended that since Sub-Section (1) of Section 94-A does not contain a non-obstante clause, the same should be read in such a manner as to understand the power conferred thereunder, as one excluding those countries with which the Central Government had entered into an Agreement under Section 90(1). In other words, his contention is that Section 94-A(1) confers power upon the Central Government to notify any country, other than those with whom an Agreement is alread .....

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otification dated 1.11.2013 is also bound to fail. C. Vires of the Press Release dated 1.11.2013 110. Following the Notification dated 1.11.2013, the Ministry of Finance issued a Press Release dated 1.11.2013. This Press Release actually contains four paragraphs (unnumbered). In the first paragraph, the Press Release speaks about the introduction of Section 94-A and the issue of the Rules thereunder. In the second paragraph, the Press Release speaks about the Agreement entered into with Cyprus. .....

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ransaction shall be treated as an international transaction resulting in application of transfer-pricing regulations including maintenance of documentations [Section 94A(2)]. -No deduction in respect of any payment made to any financial institution in Cyprus shall be allowed unless the assessee furnishes an authorisation allowing for seeking relevant information from the said financial institution [Section 94A(3)(a) read with Rule 21AC and Form 10FC]. -No deduction in respect of any other expend .....

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of the assessee [Section 94A(4)]. -Any payment made to a person located in Cyprus shall be liable for withholding tax at 30 per cent or a rate prescribed in Act, whichever is higher [Section 94A(5)]." 112. The challenge of the petitioners to the Press Release is that in the last paragraph, the Press Release makes "any payment " made to a person located in Cyprus, to be liable for withholding of tax at 30% in terms of Section 94-A(5). According to the petitioners, Section 94-A(5) u .....

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e runs contrary to the statutory prescription and hence liable to be set aside. 114. In order to drive home the above point, the learned Senior Counsel drew our attention to various provisions of the Act in which any one of these expressions is used. They are as follows:- Word Used Provision in Chapter XVII Sum 191 [Direct Payment] 194C [Payments to Contractors] 194IA [Transfer of Immovable Property] 194J [Fees for professional or technical services 194L [Acquisition of Capital Asset] 194LA [Acq .....

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tructure Debt Fund] 194LBA [Units of a business trust] 194LBB [Units of an Investment Fund] 194LC [Interest from an Indian Company] 194LD [Interest on Certain Bonds and Government Securities] 195 [Other Sums] 196A [Units of Non Residents] 196B [Units] 196C [Foreign Currency Bonds or shares of Indian company] 196D [FIIs from securities] Amount 192(1) [Salary] 192A [Accumulated Balance to Employee] 194 [Dividends] 194EE [National Savings Scheme] 194F [Repurchase of Units by Mutual Fund or UTI] 115 .....

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uot; with the disjunction "or" in between. But all these three words are preceded by the expression "any". While Sub-Section (5) of Section 94-A is worded from the point of view of the recipient of any sum, income or amount, the Press Release is worded from the point of view of the person making the payment. When we speak from the point of view of the recipient of an amount, the word "payment" will not normally be used. The Press Release is not a legal document, but .....

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ublic, do not have the same force. Therefore, the question of assailing the Press Release does not arise. 118. Drawing our attention to Clause 6.4 of the Securities Purchase Agreement entered into by and between (1) New Kovai Real Estate Private Limited, Chennai (2) Skyngelor Limited, Cyprus and (3) the writ petitioners herein, it is contended by Mr.T.Pramod Kumar Chopda, learned Standing Counsel that the petitioners had entered into the transaction in question, with eyes wide open and hence the .....

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