DTAA or Domestic Law - That is the Question!


Karnataka HC, in a recent decision in case of Vodafone South Ltd. (‘VSL’) has made some significant observations on the treaty override concept. Noting that the sovereign power of Parliament extends not only to making but also ‘breaking’ a DTAA, HC has categorically stated that ‘unilateral cancellation’ of DTAA through an amendment to domestic law, subsequent to conclusion of a DTAA, is a recognized sovereign power. HC further remarked that if after the DTAA has come into force, an Act of Parliament is passed which contains a contrary provision, the scope and effect of the legislation cannot be curtailed by reference to DTAA.


While HC has left the question unanswered as VSL did not challenge the legality of the retrospective amendments made to Sec 9(1)(vi) vide Finance Act, 2012, has it opened a pandora's box as to whether a domestic law amendment can override beneficial provisions of a DTAA? Does the HC judgment 'unsettle' a seemingly settled law as propounded by SC in Azadi Bachao and Andhra Pradesh HC in Sanofi case? Will the Supreme Court once again have to weigh in on this debate?


Girish Vanvari
Partner, Co-head Tax, KPMG

The observations of the Karnataka High Court in the Vodafone South Ltd. case make for interesting reading. Specifically, the Court’s comments seem to endorse a ‘later in time’ doctrine by stating that if after a DTAA has come into force, an Act of Parliament is passed containing a contrary provision, the scope and effect of the legislation cannot be curtailed by reference to the DTAA. Given the significance of this issue, and mindful of the large amount of litigation currently underway in connection with several of the retrospective amendments made by the Finance Act, 2012, it is unlikely that the decision of the Hon’ble Single Judge in this case will be the last word on the subject.

 There are however a few aspects that are relevant in this context. First, the sovereign power of Parliament to negate treaties may exist, but it could be argued that such a negation must be express (for e.g. by an amendment to section 90 limiting the situations where the treaty provisions will prevail over the Act). Second, there are several instances which suggest neither Parliament nor the Government consider that a subsequent amendment automatically overrides tax treaties. For example, when GAAR...

View more

Krishan Malhotra
Head Taxation, Amarchand & Mangaldas & Suresh a. Shroff & Co.

Set out below is the quote of Taxsutra.

 “The debate stirred by the Karnataka High Court’s   decision in the case of Vodafone South Limited essentially boils down to the interface between an international treaty and a subsequent legislative rule.

Every State has an inherent capacity to enter into international treaties. However, the manner in which such treaty is implemented in the State’s domestic law s a constitutional law question. India is a dualist state, so the obligations arising under the agreement or treaties are not by their own force binding upon the Indian nationals. Article 253 of the Constitution of India, 1950 provides that Parliament has the power to make any law for the whole or any part of the territory of India for implementing an international treaty, agreement, or convention. Therefore, in India international treaties are not self executing unless they are legislated.

Section 90(1) of the Income-tax Act, 1961 (‘IT Act’) routes this power in the Constitution through the Income-tax Act, 1961, providing a ready procedure for a tax treaties’ transformation into and implementation as part of domestic tax law.  Therefore, by virtue of section 90(1) of the  IT Act Double Taxation Avoidance...

View more

Partner,Deloitte Haskins & Sells

The issue before the Karnataka High Court in this case was more related to prayer for “Stay of Collection of tax” on the order of Revenue under section 201. The HC while concluding on stay has made some observations. The decision or observations was not on argument or merits..  The HC itself has concluded after making observations on impact of retrospective amendment on Double Taxation Avoidance Agreement (DTAA) that  “In view of this, a detailed discussion is required as to whether Section 90(2) of the Act is of such nature as to nullify all acts of Parliament which create tax liability under the Act, may be not in terms of the rights determined under the DTAA. However, petitioner has not raised that issue for adjudication in these writ petitions. Therefore I do not wish to dwell more on this aspect which would have been possible had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6 to Section 9(1)(vi) of the Act.”

Therefore I would like to make it clear that though HC had observed on the power and impact of retrospective amendment on DTAA yet the HC left the discussion open...

View more

Sanjay Sanghvi
Partner, Khaitan & CO.

The observations of the Hon’ble Karnataka High Court (“HC”) in the case of Vodafone South Limited (“VSL”), as to the power of the Parliament to unilaterally cancel a DTAA through an amendment in internal law, are sweeping in nature and in conflict with the principles of customary international law. One can make reference inter alia to Articles 26 and 27 of the Vienna Convention on the Law of Treaties (“VCLT”) which are relevant for enforcing a bilateral treaty between two sovereign nations.

Article 26 of the VCLT deals with the principle of pacta sunt servanda. This means that every treaty in force is binding upon the parties to it and must be performed by them in good faith. Article 27 of the VCLT deals with internal law and observance of treaties. It provides that a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.

Though India is not a signatory to the VCLT, the same containing many principles of the customary international law, all the countries who enter into bilateral treaties are expected to follow the provisions of VCLT.

It is pertinent to note that...

View more