1998-VIL-113-ITAT-MUM
Equivalent Citation: [1999] 69 ITD 292 (ITAT [Mum])
Income Tax Appellate Tribunal MUMBAI
IT APPEAL NOS. 1908 TO 1910 (MUM.) OF 1990
Date: 17.06.1998
TATA IRON & STEEL CO. LTD.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX
Dinesh Vyas, for the Appellant
K. V. Dave, for the Respondent
BENCH
H. C. SHRIVASTAVA (ACCOUNTANT MEMBER) and G. C. GUPTA (JUDICIAL MEMBER)
JUDGMENT
Per Bench As all the three appeals arise from a consolidated order passed by CIT (Appeals) and as they involve more or less similar issues, they are being disposed of together, for sake of convenience.
2. The assessee-company is India';s most important private sector company which manufactures and deals in Iron and Steel. On 29-1-1982, it entered into two agreements with DOLOMITWERKE (later on referred as DOL). The company was located in then what was known as Federal Republic of Germany (FRG). The first agreement was for obtaining technical know-how for manufacture of fluxing materials for steel making and the other for obtaining technical know-how for manufacture of specifical refractories for steel making. As per article I of both the agreements, the technical know-how is to be provided by DOL comprised of process 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 Rs. 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 Saarberg Interplan (S.I.) in Federal Republic of Germany for rendering services in the financial year 1984-85. D.M. 1,12,500 equivalent to Indian Rs. 9,02,527 was paid. The material pursuant to all the three agreements were delivered to Tata Limited, London by West German Companies.
5. The Assessing Officer was of the opinion that Explanation to section 9(1)(vi) and section 115A of IT Act read with provisions of Article VIII-A of the agreement between India and FRG for avoidance of Double Taxation (DTAA) with respect to taxes on income and capital as amended w.e.f. 1-4-1984 and brought to tax the sums paid by the assessee to Federal Republic of German Companies. This was a matter of challenge before the CIT (Appeals).
6. Before the CIT (Appeals), two arguments were raised (1) the amendments to agreement between the Government of India and Government of FRG for Avoidance of Double Taxation on income were notified by the GSR No. 680(E), dated 26-8-1985, (2) the provisions of Double Taxation Avoidance Agreement (DTAA) prior to the amendment notified on 26-8-1985 did not provide for the special definition of Royalty and for taxing it in both the states. It was submitted that the only relevant Article was Article III which provided that tax shall not be levied in anyone of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment in India. As the payments made by the assessee to the West German Companies were industrial or commercial profits of West German Companies, they were not taxable in India as per Article III prior to the amendment notified by GSR dated 26-8-1985. It was submitted that agreements between the assessee-company and West German Companies for know-how transfer and project study were entered into prior to 26-8-1985 the doctrine of promissory estoppel applies and the payments made by the appellant company are covered by the provisions of DTAA before amendment. Reliance was placed on the decision of the Supreme Court in the case of Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P. (1979) 118 ITR 326 and Calcutta High Court in Narayan Chandra Chakraborty v. Union of India (1980) 126 ITR 831.
7. The CIT (Appeals) went through the following cases relied upon by the assessee : -
1. Union of India v. Godfrey 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 shall continue to be in effect indefinitely but, anyone of the contracting parties may terminate it any time after 30th day of June in any Calendar year after 1960. This was ratified by section 90 of the IT Act, 1961 read with section 297(2)(k) of 1961 Act. Amendments to the said agreement were made by Protocol dated 28th June, 1984 which was ratified on 10th July, 1985 and notified on 26-8-1985. Article XVI of the Protocol amending the Agreement provided that the Protocol shall enter into force one month after the date of exchange of instrument of ratification and shall have effect in India in respect of income and capital assessable for any assessment year commencing on or after the 1st day of April, 1984.
8. Relying upon section 49A of the 1922 Act and section 90 of 1961 Act, he held that the Government of India, may, by notification in the Official Gazette make such provisions as may be necessary for implementing the agreement. Relying upon the decision of the Supreme Court in the case of Kailashnath (supra), he held that notification issued in accordance with the powers conferred by the Statute has statutory force and validity and, therefore, the exemption under the notification is as if it is contained in the original Act itself. He distinguished the decision of Supreme Court in ITO v. M.C. Ponnoose (1970) 75 ITR 174.
9. He also held that the principles of promissory estoppel will not be applied as it is an equitable doctrine, which cannot apply to a specific provision made. He held that no promises were made, no clarifications were sought and none were issued. According to him, it was a case of belief by the assessee that income-tax will not be attracted in respect of payments made to West German Companies.
10. He further held that neither the original agreement of 1959 nor agreement made after that could create liability for taxation which was otherwise absent under the provisions of the Income-tax Act. Looking into the provisions of section 90 and section 9 of the Income-tax Act, as amended w.e.f. 1-6-1976, he held that the payments made by the assessee in pursuance to the agreement were clearly taxable. He, accordingly, held against the assessee. He, however, deleted the interest charged under section 217 by the Assessing Officer.
11. In the other appeal, there was a special ground which related to the addition of Rs. 29,430 as income 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 could enter into treaties and agreement with foreign countries and implement Treaties, Agreements and Conventions with the foreign countries. Thus, it includes the power to legislate in this regard in the field of taxation of income. This specific power has been exercised by legislature by enacting section 90 of IT Act, 1961. As per this section, the Legislature has delegated to the Central Government the power to enter into agreement with a foreign country and by notification in the Official Gazette make such provision as may be necessary for implementing the agreement. According to the Counsel, the Legislature has not conferred this power to be exercised in a retrospective manner. The manner in which delegated power is to be exercised is as below:
"Central Government meaning President of India, under Article 77(3), allotted to the Ministry of Finance, all matters related to Finance. The Department of Finance, through Department of Revenue, Central Board of Direct Taxes its Foreign Taxation Division, attends to all functions relating to all countries for avoidance of Double Taxation of income-tax and grant of unilateral relief. It has also the power for formulation of the policy regarding avoidance of Double Taxation and periodical review of agreements with other countries for avoidance of Double Taxation."
It was submitted that in exercises of such delegated power under section 49A of I.T. Act, 1922 corresponding section 90 of IT Act, 1961, the Central Government entered into DTAA with FRG. This was ratified and published in Gazette of India by a Notification dated 13-9-1960. Under Article III of this agreement, it was provided that tax was not be levied in one of the territories on industrial or commercial product of an enterprise of other territory. Attention was invited to Article XXI of the agreement, which provides that it shall continue indefinitely, but, either of the parties may give notice of termination. The above agreement was amended again and was duly ratified by instrument of rectification which was exchanged on 10-7-1985 and was published by way of Notification dated 26-8-1985. Under Article XVI(2), it was provided that this Protocol was entered into force one month after the date of Exchange of instrument of ratification and shall have effect in India in respect of income and capital assessable to any assessment year commencing on or 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 is invalid and without any authority in Law and should be held inoperative and be ignored by reading down the relevant provision.
14. Attention was invited to section 295(4), 293(A)(i), section 2(17)(iv) Third proviso under section 35(1) to submit that wherever required, the authority has been given power to make rules with retrospective effect. Under no other circumstances, retrospective effect can be given.
15. Attention was invited to section 9(1)(vi), 9(1)(vii) and section 10(15A) of the Act to submit that the parliament itself has expressedly ensured that the rights and benefits available on the basis of existing law are not affected by the amendments.
16. Attention was invited to the narration of Craies on Statute Law page 387 and Supreme Court decision in M.C. Ponnoose case (supra) that the laws ought not to change the character of past transaction carried on upon the faith of then existing law. Attention was also invited to the best known book on Interpretation of Statutes by Phillips Maxwell. The counsel also relied upon a Privy Council decision reported in 1898 2 Q.B. page 551 to submit that retrospective operation is not to be given to statutes as to impair an existing right or obligation. Attention was also invited to the Supreme Court decision in Bakul Cashew v. STO (1986) 159 ITR 565, M.C. Ponnoose case (supra) to submit that the character of the past transaction carried upon the faith of the existing law cannot be changed. The counsel, further, relied upon the following decisions : -
1.P. Nageshwarrao v. Govt. of Andhra Pradesh 1994 Supp. (2) SCC 693,
2.Hukumchand v. Union of India (1973) 1 SCR 896,
3.Hukumchand v. Union of India (1989) 4 SCC 689,
4.Hukumchand v. Union of India AIR 1970 1 SC 1950 and other several cases.
Relying upon the Article 51(c) of the Constitution of India, it was submitted that the Government of India undertook an obligation to give exemption to taxes where German Companies received fees for Technical Services and this obligation was given for an indefinite period and consequently the said obligation should be respected. Reliance was placed on Articles 26 and 31 of VIENNA Convention of international law of Treaties. It was also submitted that if there is a conflict between the rule and substantive provisions of the Act, then, the rule must be overruled in favour of the Act. Attention was also invited 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 submitted that this line of argument was presented to reduce the agreements to the level of the circulars and then propose that it cannot have retrospective effect. It was submitted that the DTAA treaty is not notification but an act of State in the nature of Statute.
18. The departmental representative proceeded to invite our attention to the two agreements with DOL of FRG dated 29-1-1982 for technical know-how and paid D.M. 168400 in three instalments. It was also submitted that for Assessment Year 1986-87, the assessee paid 444040 D.M. and on 10-5-1984, agreements were made with another company for which D.M. 3742000 was paid in three instalments. In A.Y. 1985-86, D.M. 1247333 was actually paid. Similarly, SAARBERG Interplan order placed on 13-2-1984 required payment of 2,25,000 D.M. in two equal instalments. It was submitted that there is no dispute on the above facts.
19. The departmental representative proceeded to invite our attention to the first agreement dated 18-3-1959 reported in 40 ITR Statute, page 29 to submit that the same was to come into effect after one month from the date of exchanges of instrument. It was submitted that the agreement was to be effective beginning on or after 1-4-1958 in respect of Indian tax and 1-1-1957 in respect of FRG tax. The agreement shall continue to be effective indefinitely except on notice of termination by either parties on or after 30-6-1960. This agreement itself was notified on 13-9-1960. It was submitted that thus, the above agreement was amended by Protocol Article 9 by Protocol between the two countries. Article IX of the Protocol introduce Article VIII(A) in the DTAA which defines the fees for technical services. In the original agreement, this was not given. The introduction of article VIII(A) then introduced, made payment by assessee to German Companies taxable. Protocol was done on 28-6-1984. He further proceeded to invite our attention to Article XVI of the Protocol to submit that the same stipulates as follows : -
(i)ratification and exchange of instruments as soon as possible;
(ii)entry into force one month after exchange;
(iii)shall have effect in -
(A)F.R.G. on or after 1-1-1984.
(B)In India on or after 1-4-1984.
This was notified on 26-8-1985 which cannot operate for Assessment Years 1985-86 and 1986-87 which is year of payment by the assessee to the foreign companies and it cannot 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 subordinate of the executive or the State as such. It was submitted that treaty is not a subordinate legislation and no legislation can arise out of a contract.
20. Our attention was invited to Hood Phillips book of Constitutional and Administrative Law. It was submitted that an Act of a State is but, essentially an Act of sovereign power and hence cannot be challenged, controlled or interfered by Municipal Courts. It was submitted that since source of taxability of the amount is the treaty and since that treaty is either the manifestation of the legislative function of the State or an Act of the State. Municipal Courts cannot interfere. Regarding the argument that under section 90 of the IT Act, the treaty requires to be notified and unless it is done so, it will not have any effect, it was submitted that Treaty by being notified does not become merely a notification. The taxability of an item is routed in the Treaty. The notification is neither executive instruction nor subordinate legislation. It is Act of notifying. It was submitted that the assessee had tried to reduce the Act of notification into an act of clerk in Delhi. It was submitted that notification is not a mere act of a clerk. It is only an attempt to notify the belief at large that a particular agreement between the two States have been amended or has a force of law. It was submitted that the notifications are the media through government decisions including passing of subordinate legislation which is communicated to the public. Inviting our attention to the section 2(17)(iv) to submit that the content of the notification, as instruction per se is nothing. Attention was also invited to section 35(i)(ii)(iii) to submit that the contents of the notification are the list of instructions. About section 293A, it was submitted that the contents of the notification was the selection of the person for his special treatment in terms of taxation. The content is the executive decision. Regarding section 295, it was submitted that it was the most obvious case of subordinate legislation. The contents of the notification are rules which are a book as thick as the Act. It was submitted that Treaty is an Act of the State or legislative function under Article 246 of the constitution. It is neither instruction nor subordinate legislation. Section 90 of I.T. Act requires notification to be issued only if implementation 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 not support the case of the assessee. It was submitted that if the assessee';s case is accepted, the Tribunal would be required to clearly and unambiguously hold with the Article XVI of the treaty as ineffective and void in view of the date of the notification. It was submitted that even after the Mahindra & Mahindra Ltd.';s case (supra), the Tribunal under law has no such power. The assessee may go to a Court of Law, but, not to a Tribunal. It was submitted that the assessment order of the Assessing Officer should be upheld as done by the CIT(A).
21. We have heard the parties. When the counsel for the assessee submitted that the notification issued by the Central Government effecting the rights of this assessee in matters of taxation with retrospective effect was beyond the powers of Government and should be read down, we asked counsel for the assessee to state as to how Income-tax Appellate Tribunal which is a creature of an Income-tax Act can look into the vires of a particular notification issued under rule-making powers of the Central Government and the CBDT. The counsel for the assessee invited our attention to the decision of the ITAT, Bombay in the case of Mahindra & Mahindra Ltd. (supra) to submit "although the Tribunal was not competent to consider vires of the Act, or of the rules made thereunder, yet, where there is a conflict between the provisions of the Act and the rules, it is settled law that the rule must given way to the provisions of the Act more than when the conflict is between the provisions of the sections and a notification or circular issued by the Board". The counsel for the assessee submitted that it was within the power of the Tribunal to give a finding as to whether the notification issued by the Central Government was within its power or not. In case, it is felt that the notification was beyond the vires of the Central Government, then, we can direct the Assessing Officer to ignore the same. In any case, it was submitted that it is within our power to decide the issue of vires on this account. We heard the D.R. also on this aspect. We are of the opinion that in view of the decision of jurisdictional High Court in Bombay State Transport Corpn.';s case (supra) and Mahindra & Mahindra Ltd.';s case (supra) we hold that we have jurisdiction to decide this issue.
22. The Double Taxation Avoidance Agreement into which, 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 a small section of resident or non-resident assessees. They do not propose to give the administration more powers than the Act vested in them or curtail any benefits to which the tax payers are entitled. They merely settle the disputes on the basis on which the income of residents of India in the treaty countries is settled. This treaty has to be designed to grant relief in respect of income on which income-tax has been paid under the Income-tax Act in India and Income-tax law in the treaty country. The only purpose of such treaty should be Avoidance of Double Taxation under the Income-tax in India under corresponding law in force in the treaty country. Thus, the Central Government is empowered not merely to enter into covenants with the governments of other countries outside India, but, it has also to be notified in the official gazette which is necessary for implementing the decision. If the notification in the Official Gazette makes any provision, which is in direct conflict with the terms of the agreement, then, the terms of the notification will have to be read down as far as the assessee';s rights are affected. In case, the terms of the agreement provide that a particular type of income will be exempt from taxation in India or will be taxed by a certain rate, then, unless there is an agreement between the two countries afresh, the government of India will be in no position to affect the rights of the assessee by mere notification. No interpretation which is not consistent with the provisions of sub-section (1) of section 90 will be tenable in India. Thus, the income-tax authorities in the first place will have to determine income of every person who has any tax liability in India in accordance with the provision of requirements of the Income-tax and thereafter allow him as much relief from the liability so arrived at as the tax treaty of his government may allow. As per the well known book of learned author Phillips Baker on Double Taxation Convention and International Tax Law, Article XIV, a modern treaty enters into force upon ratification on a day. This will be the same day for both the states. The treaty may well take the effect on different dates in two contracting states usually at the beginning of the financial year of each states and may even take to effect on different date for different taxes. The department may also be retro-active in that 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 and paid to resident of the other contracting State as taxable in other state. Thus, there cannot be dispute in this case that in any case w.e.f. 10-7-1985, the date on which ratification was exchanged the royalties and fees for technical services became taxable in India. As far as the prospective taxation is concerned, there is no dispute on that account. In India, the fiscal year starts from 1st of April and ends on 31st of March. Therefore, if, as per Article XVI(2)(b), tax had been imposed in respect of income and capital assessable in any assessment year commencing on or after 1st of April, 1985, there would have been no dispute. The dispute, however, is that under Article XVI(2)(b), it is provided that in India, in respect of income and capital assessable in any assessment year commencing on or after the date of 1st day of April, 1984 tax will be imposed. In respect of German tax, the date mentioned is 1-1-1984, because in that country, the fiscal year is the calendar year. Thus, as per Article XVI(2)(b) the amount which were exempt from taxation earlier under the old protocol was made taxable from the assessment year 1984-85. It seems that this affects the rights of this assessee adversely. A particular income was not taxable under the 1959 Protocol and has been made taxable by the notification dated 26-8-1985 w.e.f. 1-4-1984. The question is to whether by issuing a notification on 26-8-1985 giving the effect to the protocol any tax could be imposed on this assessee w.e.f. 1-4-1984. Whatever may be the date of Protocol, in this case, according to the department, notification was on 26-8-1985. The fact, however, remains that as per the GSR 680, dated 26-8-1985, the Protocol was dated 10-7-1985 only. Thereafter, as per international custom, it comes into effect on 10-8-1985 and the notification is dated 26-8-1985. The date of protocol itself falls in the financial year 1985-86 and not in financial year 1984-85. As brought out by the counsel for the assessee and not disputed by the DR, the foreign Tax Division of the Central Board of Direct Taxes under ministry of Finance has to give the effect to such treaties. In case, it had been an Indian enactment, the subordinate legislation made by the CBDT would have taken effect from the date on which the same was laid at the table of the Lok Sabha. The treaty is an act of sovereign and any implementation of the 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 that certain type of income was not liable to be assessed to tax under the said treaty. Later on, on 26-8-1985, an amendment was made to the 1959 protocol and the concessions enjoyed by certain parties till that date were stopped. However, till the notification dated 26-8-1985 the persons enjoying the benefits were given a promise by the state that they would not be liable to be taxed on that type of income. Subsequent to that date, there cannot be any dispute that the exemption was withdrawn and that particular income became liable to be assessed to tax. We are of the opinion that till that date there was a promissory estoppel against the state in acting against the promises given. As held by the Hon';ble Supreme Court in the case of Motilal Padampat Sugar Mills Co. Ltd. (supra), it is not necessary that in order to contract the applicability of the doctrines of promissory estoppel that the promissee acting in relying on the terms should suffer any detriment which is necessary is only that the promissor should have altered his position; the alteration of position need not involve any detriment of the promissee. The detriment in such a case is not same prejudice suffered by the promissee, as by acting on the terms but the prejudice which would be caused to the promissee if the promissory were right to go back on the terms. By putting the date having effect from 1-4-1984 the state has gone back on the promise given to the affected assessee. This, the Central Government could not do. Therefore, on this ground itself, the act of notification is bad in law and cannot be enforced.
24. The Hon';ble Supreme Court in the case of M.C. Ponnoose (supra) held that the State Government could not entrust a Tahasildar with the power of tax recovery officer w.e.f. date prior to the date of notification and the action taken by the Tahasildar was not sustainable. Thus, though the Central Government, CBDT and FTD were authorised to issue notification, they could not issue a notification raising a tax liability w.e.f. date on which the notification itself was not enforceable in law. Thus, when the notification dated 26-8-1985 was given effect in India from 1-4-1984 it changed the character of past transactions carried upon the faith and the then existing law that a certain type of income was not assessable to tax in the territory of India. As it is notable that the treaties 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 act, an authority that means an executive authority, which has the power to make subordinate Legislature cannot make it with retrospective effect unless it is so authorised by the Legislature which has conferred that power on it. This power of notification given to the executive authority is subordinate to the terms and conditions of the DTAA. It cannot be given retrospective effect unless it is so authorised by the sovereign states who entered into such contract. For this proposition, we rely on the decision of the Supreme Court in the case of Bakul Cashew & Co. (supra).
27. In the above connection, the learned author Craise on Statute Law, page 387 has commented "A statute is to be deemed to be retrospective which takes away or impairs any vested right acquired under existing laws or creates a new obligation or imposes with new duty or attaches a new disability in respect of transactions or considerations already past". In this case, by making the income-tax chargeable on exempt income from 1-4-1984, retrospective effect has been given where none was authorised in law.
28. The Hon';ble Supreme Court in the case of P. Nageshwarrao (supra) held that where it is not provided in the law and the act, the High Court could not prepone the commencement of the liability to pay tax to the first day of the relevant quarter or year. It was further held on the facts of the case, even the government itself lacked the power to give retrospective effect to notification. In this case, by the notification, the commencement of the liability to pay tax from a date, prior to a date duly authorised under an existing protocol is not enforceable against the assessee, such an order and notification to this extent has to be read down harmoniously with the treaty. The Hon';ble Supreme Court in the case of Hukumchand (supra) held that even under the rule-making powers, if it is having retrospective effect merely by placing it on the table of Lok Sabha it would not prevent Courts from deciding its vires. In this case there is no question of placing of notification on the table of the House. It is only a question of publishing the same in the Gazette. This power of the Central Government, CBDT & FTD cannot prevent us from reading down the notification with the protocol treaty so that it does not adversely affect the rights of this tax payer till the date on which protocol is 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 regarding this appeal have been discussed by us in our order in ITA Nos. 1908, 1909/Bom./1990, dated 17-6-1998. Therefore, grounds of appeal Nos. 1, 2 & 3 are decided in accordance with our direction in ITA Nos. 1909/Bom./1990. As far as ground of appeal No. 4 is concerned, the same is also decided in favour of the assessee in view of ITAT order in ITA Nos. 6277 to 6287/Bom./1987, dated 16-11-1995.
32. This appeal is decided in favour of the assessee.
ITA No. 1908/Bom./1990
33. The grounds of appeal Nos. 1, 2 & 3 are common with the facts in our order in ITA Nos. 1909 & 1910/Bom./1990, dated 17-6-1998. Therefore, the above grounds are decided in favour of the assessee in accordance without direction in the appeals No. quoted above.
34. Ground of appeal No. 4 is also decided in favour of the assessee in accordance with our direction in ITA No. 1909/Bom./1990, dated 17-6-1998.
35. In the result, this appeal is also decided in favour of the assessee.
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