DTAA or Domestic Law - That is the Question!

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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 was enacted, it was felt necessary to specifically amend section 90 to provide that cases falling under GAAR (i.e. Chapter X-A of the Act) would prevail even if was not more beneficial than the treaty. If later amendments automatically prevailed over treaties, such specific clarificatory amendments to section 90 would not have been necessary at all.

 Similarly, the first draft of the Direct Taxes Code released in 2010 sought to expressly incorporate the ‘later in time’ approach into the Act. After due consideration of representations, the provisions were modified to restore the status quo. This entire exercise would have been unnecessary if the current language itself reflected the ‘later in time’ doctrine. Also, the Finance Minister while moving amendments to the Finance Bill, 2012 on the floor of Parliament stated that the clarificatory amendments (discussed under the Act) will not override the provisions of DTAA. Courts too have accepted this view, including in the Sanofi case. 

 These aspects have not been considered in the Vodafone South Ltd. case. While one will have to wait to see if this case is taken for further appeals, the issue raised is undoubtedly an important one, and Courts will have to examine this in greater detail sooner rather than later.