High Court reaffirms faith in international conventions

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The high court, in its wisdom, felt that the administration violated the terms and conditions of an important treaty obligation


A landmark verdict by the Punjab & Haryana High Court (HC) in response to a writ petition filed by Motorola India, a wholly-owned subsidiary of Motorola, resident of the United States of America (USA), is bound to shore up the confidence of foreign investors in India’s judicial system.

However, a unique feature under the MAP clause of the treaty with the US also provides that whilst the dispute has been submitted for resolution to the respective competent authorities, the collection of tax demands shall stay suspended until resolution. India has such a unique clause in its tax treaty with the UK and Denmark besides the US and it has emphasised its commitment by way of an administrative circular of Central Board of Direct Taxes (CBDT).

Of course, the tax demands are stayed subject to execution of an appropriate bank guarantee.

The tax administration‘s stand to appropriate money from Motorola’s Indian bank account was based on a technical argument that the officer concerned had not received an affirmative confirmation from the Department of Revenue (which overseas the competent authority function of MAP) that Motorola’s plea for MAP was admitted. To that, the HC simply directed that the controversy with respect to admission or pendency of MAP stands conceded in favour of Motorola, simply because the Department of Revenue had filed an affidavit clarifying the status of MAP and that the collection of tax demand stands suspended subject to submission of guarantee. Expressing anguish, the HC remarked it was distressing that the department drew an artificial distinction between ‘pendency’ and ‘admittance’ of MAP and used as a device to appropriate money from the bank and that its act to assume jurisdiction was not just erroneous, but bordered on malafide.

Another argument that was put forth by the tax administration in the court pleadings was that the suspension of tax collections was subject to validity of the bank guarantee, which had not been renewed. The HC remarked that renewal of bank guarantee was an automatic outcome and unless the tax payer (Motorola) instructed bankers to the contrary, no adverse inference on renewal could be drawn. The HC, on the contrary, gave a finding that Motorola’s bankers have clearly stated that the guarantee was valid as at the date of initiation of proceedings and expressed surprise as to why notice for recovery was issued in the first place. Motorola argued that the actions of the administration to forcibly recover money was a blatant violation of a bilateral convention and the alternate plea on expiry of bank guarantee was ‘an afterthought manufactured’ by the administration.

Before concluding that MAP proceedings should be completed within a time bound period of six months, the HC, justified its authority to intervene in the matter by allowing the writ. The HC, in its wisdom, felt that the administration violated the terms and conditions of an important treaty obligation under MAP and, hence, was reluctant to relegate the tax payer to alternate remedy available under the domestic law, particularly given that then matter involved the double tax treaty.

The court’s observation, though contextual, should be read as an orbiter in the sense that it shows India on high moral ground with respect to importance that the judiciary accords for adherence to international conventions on tax and investment protocols and more importantly, its empowerment to intervene in a writ jurisdiction. Besides, its directive for time-bound resolution of dispute submitted under MAP would be welcome by the US and other foreign investors who have been under pressure lately. I can just hope that courts in India do exercise discretion more frequently as it is bound to send the correct message. 

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