IT amendments can't be ignored with DTAA treaty

The scope and effect of the legislation cannot be curtailed by the DTAA, if after it comes into force an Act of Parliament is passed which contains contrary provision - This issue could have been discussed further had the petitioner questioned the legality of the Finance Act, 2012 inserting Explanations 5 and 6 in section 9(1)(vi) of the Act - The Tribunal had rightly directed deposit of 50 per cent of tax liability on the grounds urged by the petitioner seeking grant of interim stay

Facts:

(1) The assessee, engaged in business of providing telecom services to its subscribers in India, entered into agreements with non-resident telecom operators ('NTOs') for providing bandwidth and inter-connects capacity outside India.

(2) It also entered into a capacity transfer agreement with 'Belgacom' (a tax resident of Belgium) for acquisition of capacity over the Europe-India gateway (EIG) cable system.

(3) Assessee argued that the payments to NTOs and Belgacom couldn't be termed as 'royalty' under the provisions of Income-tax Act.

(4) Accordingly, it filed the instant writ with the High Court against the impugned order of Tribunal granting limited stay on recovery of tax.

The High Court held in favour of revenue as under:

(1) section 9(1)(vi) makes it clear that payments for rendering any services in connection with activities referred to in clauses (iv) and (v) of the Explanation 2 to section 9(1)(vi) would attract the definition of 'Royalty.'

(2) Explanations 5 and 6 to section 9(1)(vi) inserted by the Finance Act, 2012 provide that royalty includes consideration in respect of any right, property orinformation. As these Explanations are in the book of statute, unless they are declared ultra vires or their legality is tested, it is indispensable for the Assessing Officer to apply these Explanations while determining tax liability under the Act;

(3) The petitioner had not questioned the validity of the said amendments in this writ. Thus, the Assessing Officer was bound to apply such provisions in determining the taxability of the payments made by the petitioner to the NTOs;

(4) The scope and effect of the legislation can't be curtailed by the DTAA if after its entry into force an Act of Parliament is passed which contains contrary provision. The DTAA is entered into pursuant to the power conferred upon the Government under section 90;

(5) Thus, a detailed discussion was required as to whether section 90(2) was of such nature so as to nullify all Acts of the Parliament which create tax liability under the Act? This issue could be debated further had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6in section 9(1)(vi) of the Act;

(6) Any observation made on the above issues would not be construed as an expression of opinion on merit in view of the fact that all these issues are sub judice in the two appeals filed before the Tribunal. Thus, it needed to be examined whether the petitioner had made out a case for grant of stay in its entirety.

(7) There was no material placed before the Court to show that the petitioner would suffer irreparable hardship and injuries to his favour due to order of Tribunal granting limited stay on recovery of tax. The Tribunal had answered the grounds urged by the petitioner seeking grant of interim stay and had reached the logical conclusion by directing the petitioner to deposit 50% of the tax liability. The order of the Tribunal could not be interfered with.

Contrary views have emerged from certain verdicts of High Court on the issue as to whether retrospective amendments in the Income-tax Act could override the provisions of treaty which can be settled by the Supreme Court only. In case of DIT v. Nokia Networks OY [2012] 25 taxmann.com 225 and Sanofi Pasteur Holding SA v. Department of Revenue, Ministry of Finance [2013] 30 taxmann.com 222 (Andhra Pradesh) the High Courts have held that the provisions of retrospective amendments can't override the provisions of treaty.
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