Madras HC upholds Constitutional validity of section 94A (1) and CBDT Notification 86/2013 related to Cyprus

In a recent judgment, the Madras High Court has upheld the Constitutional validity of section 94A(1) of the Income tax Act, 1961 and CBDT Notification 86/2013 specifying ‘Cyprus’ as the ‘notified jurisdictional area for the purpose of the said section.

Case Details:
W.P.Nos.17241 to 17243 & 17407 to 17412 of 2015
P.Sivakumar vs. .Union of India, Ministry of Finance, CBDT, Income Tax Officer (International Taxation
Coram: Justice V. Ramasubramanian and Justice T. Mathivanan
Date of Judgment: 12/04/2016

Prayer(s) made
The petition(s) were filed under Article 226 of The Constitution of India praying  the High Court;
(a) to declare Section 94A(1) of the Income Tax Act, 1961 as ultra vires of The Constitution of India and also being beyond the legislative competence of Parliament under Articles 246 and 248.
(b) to declare CBDT Notification No.86/2013 issued under Section 94A of the Income Tax Act, 1961 as ultra vires Section 94A of Income Tax Act read with Articles 14, 19 and 265 of The Constitution of India, and
(c) to declare Press Release titled Concerning The Double Tax Treaty between Cyprus and India dated November 1, 2013 issued by the Ministry of Finance as ultra vires Sections 4, 5, 94A(5) and 195 of the Income Tax Act, 1961 read with Articles 14 and 265 of The Constitution of India

Background of Section 94A and challenged Notification
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 Section 94-A, the Central Government may, having regard to the lack of effective exchange of information with any country or territory outside India, specify the said country or territory as a notified jurisdictional area in relation to transactions entered into by any assesse. India and Cyprus have entered into an Agreement for avoidance of double taxation of income and prevention of fiscal evasion which was in force since 21st December, 1994. However, since Cyprus was not providing the information requested by the Indian tax authorities under the exchange terms of the agreement, CBDT through Notification 86/2013 specified Cyprus as a notified jurisdictional area under Section 94-A.

The implications of such a Notification were:
If an assessee enters into a transaction with a person in Cyprus, then all the parties to the transaction 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(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 respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus shall be allowed unless the assessee maintains and furnishes the prescribed information [Section 94-A(3)(b) read with Rule 21AC].

If any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall 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)].

Brief facts of the Case:
A tripartite Agreement dated 16.10.2014 was entered into by and between (i) an Indian company by name New Kovai Real Estate Private Limited (ii) a company incorporated in the country of and under the laws of Cyprus by name Skyngelor Limited and (iii) the three petitioners herein. By the said Agreement, the Cyprus company, which was holding about 15,200 equity shares of the face value of INR 10 each and about 21,39,200 compulsorily convertible debentures of the face value of INR 100 in Kovai Real Estate Private Limited, agreed and undertook to sell all those shares and debentures to the writ petitioners herein. Payment of the purchase consideration was agreed to be done in 4 tranches. Proceedings were initiated in terms of section 94-A(1) and the Notification No.86/2013 and the petitioners were called upon 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 as requied by sub-section (5), warranting the initiation of proceedings under Section 201(1)/201(1A)


Excerpts from High Court Judgment:

It will be of interest to note that in Ram Jethmalani, the Supreme Court took note of the Vienna Convention as well as the decision in Azadi Bachao Andolan and came to a conclusion towards the end of paragraph 70 of the SCC report, which reads as follows :

“The Government cannot bind India in a manner that derogates from the Constitutional provisions, values and imperatives.”

The above observation, in our considered view, is a complete answer to the challenge of the petitioners to the power of the Parliament to enact Section 94A, despite the existence of an agreement entered into under Section 90(1).

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 adopted by the leaders of G20 Nations, in a Summit held at London on 2.4.2009. At the end of the Summit, a statement titled as ‘Global Leaders Statement’ was issued, ….

…… many countries have become guarded in their approach towards Double Taxation Avoidance Agreements. In such circumstances, we cannot accept a contention that would surrender the Legislative power of the Parliament to the will of the Executive. Hence, the writ petitions challenging the validity of Section 94-A are liable to be dismissed.

The plain language of Sub-Section (1) of Section 94A leaves no room 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

…. the Supreme Court made it clear in para 44 of the report in Azadi Bachao Andolan that though the Circulars issued by CBDT under Section 119 of the Act, have statutory force, the Press Releases issued by CBDT for the information of the public, do not have the same force. Therefore, the question of assailing the Press Release does not arise.

…….the petitioners appear to have indulged in an adventure in making remittances in full. Actually the petitioners should have deducted tax at source in terms of Clause 6.4 of the Securities Purchase Agreement and thereafter fought a legal battle with the Department for refund. If the petitioners had taken a calculated risk by making the payments, they cannot later turn around and find fault with the statutory prescription and with the Notification and Press Release.

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 assumed different connotations in the recent past and Panama appears to have followed Cyprus. Therefore, Section 94A was the need of the hour and we do not find the same to suffer from unconstitutionality. Hence, all the writ petitions are dismissed.

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