Section 94-A(1) is Constitutional Valid : Madras High Court

Country with whom India has DTAA can be notified as Notified Jurisdictional Area u/s 94A

Brief of the case:

• The Hon’ble Madras High court in the above cited case held that central govt can notify a country as notified jurisdictional area u/s 94A inspite of the fact that there exist a Double Tax Avoidance Agreement provided the DTAA is not serving the intended purpose for which it was entered into. It is because 90(1), which empowers the Central Government to enter into an Agreement with the Government of a foreign country and Section 94A , which empowers the Central Government to specify any country as a notified jurisdictional area.
• It could, at the most, be a conflict between the manner in which, the delegated power conferred under one provision is exercised and a similar power under another provision is exercised.
  

Facts of the case:

• The petitioners entered into an agreement with a company incorporated in the country of and under the laws of Cyprus named as Skyngelor Limited. As per the agreement the petitioners agreed to buy 15,200 equity shares of the face value of INR 10 each and about 21,39,200 compulsorily convertible debentures held by the Cyprus company in Kovai Real Estate Private Limited (Indian company).
• After three months 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 for non-deduction of tax at source on payments made to Cyprus company warranting the initiation of proceedings under Section 201(1)/201(1A) of the Income Tax Act.
• The petitioners contended that that they would have had an obligation to deduct tax at source, only if there was chargeability of a payment under Section 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. 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.
• The petitioners immediately filed statutory appeals under Section 246A of the Act before the Commissioner of Income Tax (Appeals). Simultaneously, the petitioners have come up with the above writ petitions challenging the validity of Section 94-A(1), the Notification dated and press release dated 01.11.2013.
  

Contention of the Assessee:

• It was submitted that once India has entered into a Treaty with another country and such Treaty has also been notified under Section 90 of the Income Tax Act, 1961, the Treaty becomes a law under Article 253.Therefore, 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.
• In the present case , the govt in exercise of powers conferred upon by sec 90(1) has entered into DTAA with Cyprus but also notified it under sec 94A which makes Cyprus as notified jurisdictional area causing additional tax burden on assessee inspite of the tax treaty entered into with it.
  

Held by Hon’ble High Court:

• High court observed that Sec 90(1) of the Act is an enabling provision that empowers the Central Government to enter into an agreement in the nature of a Double Taxation Avoidance Agreement. Once such an agreement is entered into, an assessee, to whom such an agreement applies, would have the benefit of the application of the other provisions of the Income Tax Act, to the extent they are more beneficial to him. But Sec 90 did not say either expressly or by necessary implication that the law made by Parliament would become invalid or redundant to the extent it is inconsistent with the terms of the Agreement.
• Section 90(1), which empowers the Central Government to enter into an Agreement with the Government of a foreign country and Section 94A (which is the subject matter of dispute in the present case), which empowers the Central Government to specify any 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 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 one provision is exercised and a similar power under another provision is exercised.

• 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).
• Any agreement entered into by the Central Government by virtue of the power conferred by Section 90(1) is in exercise of a delegated power. Similarly, any Notification issued under Section 94A(1) is also in exercise of another delegated power. Therefore, there is no necessity to incorporate a non obstante clause in Sub-Section (1) of Section 94A because there can be two set of delegated power to serve different purpose which might appear contradictory but still hold good as long as the parliament has justification to do so.