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TMI Blog1998 (6) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess details including flow sheets, plant layout tender specifications for main process equipment and technical data for remaining equipment. It also contains suggestion of modification to existing equipment for improving the productivity and product quality. For the services to be rendered by DOL, as per agreement, the assessee had to pay D.M. 1,68,400 net of applicable Indian taxes. For the services to be rendered as per second agreement, the assessee had to pay to DOL D.M. 11,63,720, net of Indian taxes. During financial year 1985-86 relevant for assessment year 1986-87, the assessee paid DOL D.M. 4,44,040 in respect of both the agreements which then converted to Indian Rupees came to ₹ 20,67,225. 3.On 10-5-1984, the assessee-company entered into an agreement with M/s. Erich Friedrich Metalle-Huttenprodukte (E.M.H.) a company in the Federal Republic of Germany for obtaining process know-how and engineering services for its steel works Waste Recycling Plant. The assessee was required to pay D.M. 37,42,000. It paid D.M. 12,47,333 in the financial year 1984-85, equivalent to Indian Rupee of 50,58,770. 4. Another agreement was made with another company known as Saarber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Philips India Ltd. (1986) 158 ITR 574(SC), 2. Bakul Oil Industries v. State of Gujarat (1987) 165 ITR 6(SC), 3. Pournami Oil Mills v. State of Kerala (1987) 165 ITR 57(SC), 4. Bombay Conductors Electricals Ltd. v. K. Chandramouli (1984) 145 ITR 272 (Delhi)(FB), 5. Bansal Exports (P.) Ltd. v. Union of India (1984) 145 ITR 642(Delhi)(FB) and 6. Kailashnath v. State of UP AIR 1957 SC 790. But, he did not accept the contentions of the assessee';s counsel. He found that the first DTAA between India and FRG was made on 18-3-1959 and was notified by GSR 1090, dated 13-9-1960, under powers conferred by section 49A of the IT Act, 1922. The Central Government directed that all the provisions of the said agreement shall be given effect to in the Union of India. Article XX of that agreement provided that the agreement shall come into force after the expiry of a month following the date on which the instruments of ratification are exchanged and shall thereupon have the effect in respect of the Indian tax in relation to income for any previous year relevant to any year of assessment year beginning on or after the 1st April, 1958. Article XXI provided that the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome to the payment made by the assessee to M/s. Saarberg Interplan for Project Study. The question was whether such an expenditure incurred by the assessee is income in the case of a foreign company or not. After going through the quotation of project report given in May, 1983, clause 11, he upheld the addition. The assessee is in appeal on all grounds. 12. Before us, the counsel for the assessee submitted as under : - The contracts between the assessees and the German Companies were executed at that time when fees payable were exempt in terms of the agreement. The amendment in the agreement by way of insertion of new Article VIII(A) to the extent to which it alters the addition exempt character of the above contracts with retrospective effect from 1-4-1984 is invalid and beyond the delegated power conferred by the Central Government in this behalf. The main submission is that the Tribunal should ignore the same as by reading it down. 13. The counsel for the assessee, inviting our attention to the preamble to the Constitution of India, Article 246 of the Constitution read with List I in the VIIth Schedule in entry No. 14 of various list submitted that the Union of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after 1-4-1984. The old Article III was deleted and was replaced by new Article VIII(A) which was inserted, as a result, thereon, fees for Technical Services became taxable in a contracting state in which this arose and according to laws of that state. Relying on the book of Shri K. Shrinivasan, on guide to DTAA it was submitted that under section 90 of I.T. Act, the Central Government has not been given the power to enter into such agreement with any retrospective effect and the Central Government can exercise this power only with prospective effect. It was submitted that the amendment made by the Central Government in agreement with FRG by Notification dated 26-8-1985 is invalid and inoperative to the extent to which it withdraws the exempt character of the contracts executed between the assessees and three foreign companies before 26-8-1985 and that too with retrospective effect from 1-4-1984. In other words, it was submitted that the Central Government have made the amendment withdrawing the exemption available to the contracts entering into before 26-8-1985 and in any event, it could not have made the amendment w.e.f. 1-4-1984. It was, therefore, submitted that the amendment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited to the decision of the ITAT in the case of Mahindra Mahindra Ltd. v. ITO (1984) 8 ITD 427(Bom.) to submit that when the conflict is between the provision of a section and notification or circular issued by the Board, then, the rule must give way to the provisions of the Act. Reliance was also placed on the decision of Bombay High Court in CIT v. Bombay State Transport Corpn. (1979) 118 ITR 399and Kerala High Court 120 ITR 32. It was submitted that the notification dated 26-8-1985 having retrospective effect from 1-4-1984 is contrary to the rule-making powers and overrides the terms of the DTAA 1959. Accordingly, it was submitted that the same should be ignored and assessment should be made as if this change had not taken place. 17. The learned Departmental Representative presented the departments case veryably to submit that the argument that the circulars are not statute, but executive instructions and, therefore, cannot have retrospective effect is incorrect. Attention was invited to page 6 and para 8 of CIT (Appeals)';s order referring to the agreements made under section 90 having statutory force. The CIT(Appeals) has not referred to the circulars. It was submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot hold these payments taxable in the hands of the assessee as representative of assessee, as the payments are in pursuance of an agreement which pre-dates the Protocol. Inviting our attention to the various arguments raised by the assessee';s counsel, he submitted that the double taxation convention can be regarded having dual nature. On the one hand, they are international agreements entered into between governments for allocation of physical jurisdiction and on the other hand, they become part of tax law of each contracting state whether by direct incorporation into domestic law or by enactment into that law. Inviting our attention to article 246 of the constitution including entries 10 14 read with section 90 of the Income-tax Act, it was submitted that the treaty by an Act of the State carried out through the State Machinery as authorised and the executive figures nowhere in the picture except as an instrument of the Parliament. It was submitted that an Act of the State is not an executive instruction. In instruction of such nature, the State directs its subordinate machinery to do or to refrain from doing certain things. In a treaty, the other contracting party is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plementation of the treaty requires any changes in law besides what is already contained in the Treaty. Inviting our attention to the notification in this case, it was submitted that same merely reproduction of the bare text of Protocol. It was submitted that in this case, the notification is nothing, but a pure medium for publication of the content of the Treaty. It does not act, cannot modify or reduce any part thereof. It was submitted that the notification is neither an executive instruction nor subordinate legislation. Regarding the arguments that in case of notification being in conflict with the statute, the format should be read down, it was submitted that notification is merely a medium, which is the very basis for existence of the treaty. It was submitted that if it means that the date of notification prevail over the date in Article XVI of the Treaty, it just reverses the order in which reading down should occur. It was submitted that to the Treaty date conflicts with the notification date, the later should be read down and the Article XVI of the Treaty should prevail. Reliance was placed on various authorities like Phillip Baker. Sweet Maxwell to submit that they do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich, India, has so far entered with more than 50 countries are in the nature of delegated legislation. Section 90 of the I.T. Act is only an enabling provision. However, unlike most other provisions in the Income-tax Act, it leaves the Executive with a great deal of functional flexibility. It is noticeable that a treat of DTAA is not laid before parliament unlike legislation framed under other different laws. The main reason that why this is not done is that the purpose of a treaty is not more regulation or the prescribing procedure for carrying out the purposes of the substantive provisions of the main Act as in the cases of rule framed under different provisions of the Act. The main purpose of a treaty is a rational and equitable allocation between two countries of income over which both have tax jurisdiction without prejudice to the tax payer who has earned the income. The entire effort in a treaty is designed to promote trade between the concerned countries and is based on the principles of reciprocity. These type of treaties have evolved over the years and rules and guidelines are more or less fixed. These agreements are of little interest to the general public as they affect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it is deemed to have taken the effect on a date of the board, power to the ratification of the treaty by contracting state. However, where a treaty is retro-active, it is a U.K. practice to provide that the treaty will not have the effect to place a tax payer in a worst position, than he or she was under the earlier provision of treaty. Thus, no retro-active act can place a tax payer in a position worse than he or she was in the previous treaty. If in fact a particular treaty is enforced at a particular time, when a particular income was liable to be taxed, then, under a subsequent treaty no effect can be given to a provision making that exempt income as taxable. Any departmental retrospectivity would run counter to the constitutional retrospectivity of the state committed to rule of law. Under such circumstances, the retrospectivity of a DTAA adversely affecting the rights of the tax payer will have no force. By the notification, GSR No. 680 dated 26-8-1985, the agreement between the government of India and FRG, signed on 18-3-1959 was amended. New Article VIII-A was inserted in the new agreement making royalties and fees for technical services arising in the contracting State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same does not require that same should be placed on the table of the house. However, the fact remains that any authority which has the power to make subordinate legislation cannot make it with retrospective effect unless it is so authorised by Legislature which has conferred the rule-making power on it. The act of treaty is not an act of Parliament or Legislature. It is an act between two sovereign powers. The terms and conditions prescribed in that treaty have to be strictly followed and any diversion from the same will have to have the stamp of two contracting parties. This assessee, atleast till 26-8-1985 when the notification was issued was under a bona fide impression that a certain income arising in India will not be liable to be taxed in view of the Protocol and Treaty of 1959. It is only on 26-8-1985 that this notification enforces that his rights are to be adversely affected from 1-4-1984. It is obvious that this notification has tried to do what is not authorised by the treaty represented by the two countries. 23. When the treaty and Protocol of 1959 was notified and was not amended till 26-8-1985, the persons who were affected by the said treaty and protocol knew th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aties are not creation of Legislature, but, are creation of a contract between two sovereign parties, they take effect after there is a regular Protocol, ratification and notification. The notification has to be under the terms and conditions prescribed in that protocol. Thus, notification dated 26-8-1985 was against the terms and conditions notified in 1959-60 protocol in force till 10-8-1985. While in case of an enactment of parliament, retrospective effect can be given by making suitable amendment, in case of DTAA unless the two sovereign parties agree to a certain amendment from a certain date, no effect can be given. 25. We are of the opinion that the notification dated 26-8-1985 giving effect to protocol from 1-4-1984 has to be read down in a manner that it does not adversely affect the rights of this assessee in a manner so as to fasten it with a liability which under the 1959-60 protocol could not be done. If we read the treaty with the protocol harmoniously it becomes obvious that this assessee cannot be fastened with any tax liability which was exempt under 1959 treaty and protocol atleast till 26-8-1985. 26. It is notable that even in the case of the legislative ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s amended. Notification can have the effect from the date of its publication in the Gazette. This power, however, does not include a power to assign the notification with retrospective effect. In this case, as DTAA protocol is an act between two sovereign states, under no circumstances, the notification can take away the rights vested in the tax payer with retrospective effect. 29. As per 1985 protocol and all such DTAA protocols, no retrospective effect can be given to a particular term of the protocol unless the protocol itself authorises so. Under no circumstances, the executive government exercising the subordinate power can make an item of taxable nature with retrospective effect if the same is not provided in the protocol (Moddy Food Products v. CST AIR 1956 35). Therefore, on reading down the notification with the Treaty and Protocol we are of the opinion that the assessment for assessment year 1985-86 in this case, has to be made in conformity with the Protocol of 1959-60 under which certain incomes were exempt from taxation in the hands of this assessee. 30. The grounds of appeal on the above accounts are allowed. ITA No. 1910/Bom./1990 31. The basic facts r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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