The High Court Ruled

IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) FRIDAY, THE FIFTEENTH DAY OF FEBRUARY, TWO THOUSAND AND THIRTEEN PRESENT THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE M.S. RAMACHANDRA RAO W.P.Nos. 14212 of 2010, 3339 and 3358 of 2012 W.P.No.14212 of 2010 M/s.Sanofi Pasteur Holding SA, represented by its Chairman, President and Chief Executive Officer. ... PETITIONER VERSUS The Department of Revenue Ministry of Finance, Government of India, New Delhi and others ... RESPONDENTS Counsel for petitioners : Sri Aravind Datar, Senior Counsel Sri Poras Kaka, Senior Counsel Sri Ravi S, Senior Counsel Sri Ch. Pushyam Kiran Sri Thoom Srinivas Ms. Divya Datla Counsel for respondents : Sri Ponnam Ashok Goud (Asst. Solicitor General), Sri Mohan Parasaran, Additional Solicitor General for India, Sri S. Sasidhar Reddy (SC for Income Tax) 1 The Court made the following : THE HONOURABLE SRI JUSTICE GODA RAGHURAM AND THE HONOURABLE SRI JUSTICE M.S. RAMACHANDRA RAO W.P.Nos.14212 of 2010, 3339 and 3358 of 2012 COMMON ORDER : (per JUSTICE GODA RAGHURAM) Competing narratives presented for consideration in these cases arise essentially out of the perception of Indian tax authorities - executors of the Indian – Income Tax Act, 1961 (the Act) that petitioners’ claim for immunity (to tax under provisions of the Act; on a transaction involving sale of shares of a company registered and resident in France to another and similarly circumstanced corporate entity), is an Indian tax avoidance stratagem. Petitioners contend to the contrary. An agreement between India and France inter alia for avoidance of double taxation, duly notified for effectuation in India (hereinafter more fully described and referred to as the Double Taxation Avoidance Agreement – the DTAA), also enters into the equation. Synergies between DTAA provisions and those of the Act; and how these inform the core issue - as to the liability to tax; and direct the allocation of the tax chargeable on the transaction in issue, to one or the other contracting State (India or France), is the quintessential problematic that falls for our consideration. In the context, we are of the considered view that a prefatory 2 overview, of the origins and evolution of tax treaties and how these conflate, co- operate with domestic tax legislation and converge to signal a unified raft of applicable norms, is appropriate. Tax treaties and domestic tax legislation : norms of co-existence : International juridical double-taxation could generically be defined as imposition of comparable taxes in two or more States on the same tax-bearer in respect of the same subject matter and for identical periods. In recognition of the pejorative effect on exchange of goods and services and movement of capital,technology and persons, agreements/treaties/conventions/ protocols evolved for removing obstacles that double-taxation presents to development of economic relations between nations. Current international law permits taxation of foreign economic transactions when a sufficient nexus exists between the tax- payer and the taxing State, such as through residence, citizenship, habitual abode, situs of capital and the like. Normatively, customary international law does not forbid double-taxation, resulting from the interaction of the domestic laws of two or more States, as long as legislation of each of the concerned States is consistent with international law. International law has yet to develop an adequate raft of norms to regulate the incidence of double-taxation by introduction of rules establishing which of the two or more States having a nexus with the transaction in question is entitled to the levy of tax, to what extent and other allied norms. A major component of this irritant phenomenon is therefore regulated by bilateral (or 3 multi-lateral) double-taxation treaties. The concept of bilateral agreements between individual States for avoidance of double-taxation emerged towards the end of the 19 th century. Only federally related or closely allied States were involved in the initial phase, of State-centric taxation regimes evolving organically to adapt to the accelerating pace of the globalizing and coalescing economic order. The process gathered momentum after the 1 st World War in Central Europe and spread to other areas in the western hemisphere. Efforts of the League of Nations also contributed substantially to assimilation of existing bilateral treaties and to the development of uniform model treaties. Efforts of theOrganization for European Economic Co-operation (OEEC) and of its successor, the Organization for Economic Co-operation and Development (OECD) to develop a system for the avoidance of double-taxation picked up from where the efforts of the League of Nations tapered-off. Between 1956 and 1961, the OECD'sCommittee on fiscal affairs submitted a series of model treaty articles in four interim reports followed by a summary report in 1963. The OECD Council inter alia recommended that member States should continue efforts to enter bilateral double-tax agreements while adopting as a basis for their negotiations the model submitted by the fiscal committee and as interpreted by the commentaries in the report, while making allowances for the limitations and reservations in the commentary. The OECD complete model treaty and the commentaries thereon were revised from time to time. This process continues. Double tax treaties are international agreements, their creation and consequences determined according to the rules contained in the Vienna 4 Convention on the Law of Treaties, 1969 (VCLT). The conclusion of a treaty/convention is preceded by negotiations. States intending to conclude a treaty are represented by the appropriate level of executive, political or diplomatic expertise according to individual practices and judgment of the participant States. There are several steps in the negotiations phase eventually leading to conclusion of the treaty. Treaties or conventions are thus instruments signaling sovereign political choices negotiated between States. The efficacy of a treaty over domestic law turns upon either State - specific conventions operating to govern the sovereign practices, or where there is a written Constitution provisions of that Charter. See Introduction [1] Double-taxation treaty rules do not “authorize” or “allocate” jurisdiction to tax to the contracting State nor attribute the “right to tax”. As is recognized by public international law and constitutional law, States have the original jurisdiction to tax, as an attribute of sovereignty. What double taxation treaties do is to establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. Essentially therefore, through the mechanism of a treaty, the contracting States mutually bind themselves not to levy taxes, or to tax only to a limited extent, in cases where the treaty reserves taxation for the other contracting States, either wholly or in part. Contracting States thus and qua treaty provisions, waive tax claims or divide tax sources and/or the taxable object. Unlike rules of private international law tax treaty norms assume that both contracting States tax according to their own law. Treaty rules do not lead to the application of foreign law. What treaty rules do is, to limit the content of the tax 5 law of both the contracting States to avoid double-taxation. In effect, doubletaxation avoidance treaty rules merely alter the legal consequences derived from the tax laws of the contracting States, either by excluding application of provisions of the domestic tax law where these apply or by obliging one or both of the concerned States to allow a credit against their domestic tax for taxes paid in the other State. Klaus Vogel (supra) explains that rules of double taxation are thus not conflict rules, similar to that in private international law but are rules of limitation of law, comparable to those of international administrative law. In India, Article 253 of the Constitution (fortified by a non-- obstante clause qua the normal distribution of legislative powers in the Indian federal context set out in Part XI) authorizes Parliament power to make any law for the whole or any part or territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision at any international conference, association or other body. Article 253 read with Entries 13 and 14 of the Seventh Schedule would imply that in implementing a treaty, or a convention with another country or countries, or any decision made in an international conference, association or other body, the limitations imposed by Articles 245 and 246(3) are eclipsed and the total field of legislation is open to the Parliament, enabling Parliament to invade fields of legislation enumerated in List II as well, insofar as may be necessary for the purpose of implementing the treaty, etc., obligations of India - Maganbhai Ishwarbhai Patel v. Union of India [2] ; HM Seervai [3] . 6 Our Courts have held that regard must be had to international conventions and norms while interpreting domestic law provisions, when there is no inconsistency between them and there is a void in the domestic law; that Courts are under an obligation, within legitimate limits to so interpret municipal law as to avoid confrontation with the comity of Nations or well-established principles of international law and where municipal law is not in variance with the international treaty - Visakha v. State of Rajasthan [4] ; Gramophone India Co. v. Birendra Bahadur Panday [5] ; and RD Upadhyay v. State of Andhra Pradesh [6] . However, this is not to say that a treaty must be given effect to without a law or in the absence of municipal law. Thus a treaty entered, to which India is a signatory cannot become a law of the land or be implemented unless Parliament passes a law referable to Article 253.

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