Thursday, July 29, 2010

The Force of Attraction principle

In an earlier post, Ankit had discussed on the findings of the ITAT in the Linklaters judgement on the application of the principle of territorial nexus and subsequently on extension of Treaty benefits to fiscally transparent entities. A third dimension to the judgement discusses the computation of profits attributable to a Permanent Establishment in consonance with the Force of attraction principle. The objective of this post is to understand the nature and recognition of this principle.
The underlying principle of the Force of Attraction rule envisages that when an entity has a Permanent establishment in another country, the host country will have the right to tax the PE for all its activities which take place either inside its territory or in other territories in so far as it is either directly or indirectly attributable to the P.E. In other words it expands the Source rule for taxability. Illustration- a Company X has a P.E in India which is involved with construction work. It undertakes a contract with a party outside India for undertaking a construction business. The profit which may generate from the contract is liable to be taxed in India on the basis of this principle.
Pertinent to note is the fact that this principle is amorphous in its applicability in the International platform. In this regard attention needs to be paid to two key points of debate. Firstly, most developed countries subscribe to the view that the principle is absurd as it unnecessarily expands the scope of taxation under the Source rule whereby it gives the right of taxation to a country which is not concerned with the activity undertaken by the P.E. The other point of contention being that there still exists a lacuna in so far as the existence of the P.E. is concerned to which the activity can be extended to. Thus most recent tax treaties have abandoned the use of this principle. On the flipside, the basic contention for upholding the principle is that the country in which the P.E is located provides an opportunity to the P.E to undertake transactions thereby creating a territorial nexus between the activities of the P.E and income generated. The principle has a varied applicability In the U.N Model Convention and the OECD Model Report. The OECD does away completely with the application of this principle whereas the U.N Model Convention allows for restrictive use of the principle. The Restrictive use of this principle under the Model Convention states that the rule will apply only to business profits and not to income from capital. To put it simply according to the U.N Model Convention( Article 7(b) and (c) ) the source country will have the right to tax the P.E. in so far as sales are made of goods or merchandise of the same or the similar kind as those sold through the P.E, irrespective of it being effected by the P.E. These will be deemed to have an economic nexus to the source country thereby making it taxable by the source country. A similar approach will be undertaken if the P.E is involved in other business activities and the same or similar activities are performed without any connection to the P.E.
The use of the principle has been undergoing a paradigm shift globally. However it is interesting to note that India has adhered to the use of the Force of Attraction rule in both its pure application as well as in its restrictive application. In the Roxon case, the AAR had the opportunity to discuss at length the application of the Force of Attraction rule in India. In a nutshell, it held that the basis of this principle was that the as long as a Permanent Establishment was not set-up in the source state, no right of taxation could be attributed to the same. Further the scope of the Indo- Finnish treaty is restricted to the sale of ‘same or similar’ goods. Only those sales of goods which are same or similar to the business of sale of goods by the P.E in India will be taxable in India. It can therefore be concluded that the treaty uses the restrictive rule of Force of Attraction. Concluding, only those business profits which have an economic nexus to the P.E in India will be taxable in India.
In the Linklaters judgment, the Force of attraction rule was strictly adhered to. Article 7 of the Indo-U.K tax treaty explicitly states that only profits of the enterprise which are directly or indirectly attributable to the P.E will be taxed by the source state. Therefore it can be inferred that the Indo-U.K treaty embodies the Force of Attraction principle and does not limit its applicability to the restrictive use of the aforementioned principle. In effect all the profits which are generated by the P.E irrespective of the service being rendered or utilised in another country, India being the host country will have a right to tax the P.E.
In today’s globalised economy, tax treaties do not subscribe to the principle of the Force of Attraction in its pure form as it has become increasingly difficult to justify its application. It would only result in unfair tax advantages to the source country which would thereby result in lowering investment for such countries which subscribe to an unrestricted use of this principle. In effect this principle tries to expand the principle of territorial nexus. Further there seems to be an inconsistency in its application in so far as its incorporation in tax treaties is concerned. Although countries have started adopting the restrictive use of this principle there still exists no threshold for determining under which circumstances can this principle be applied in its pure form or its restrictive form. This has led to countries applying the principle without any uniformity in different treaties. Ultimately what needs to be determined is whether the application of this principle in its pure form is justified and if not then whether there should be a uniform application of the two forms of this principle as adopted by a country.

Wednesday, July 28, 2010

Arbitration Act Extends to Civil Disputes: H Srinivas Pai

In H Srinivas Pai v. H.V.Pai, (dated 9.07.2010) the Supreme Court has observed that the Arbitration and Conciliation Act, 1996 extends to "civil disputes" and is not limited merely to "commercial disputes". Here is the relevant extract from the order:

"There is absolutely no basis for the observation of the High Court that Arbitration and Conciliation Act, 1996 will not apply to 'civil disputes', but will apply only to 'commercial disputes' or international commercial disputes. The Act applies to domestic arbitration's, international commercial arbitration's and conciliation's. The applicability of the Act does not depend upon the dispute being a commercial dispute. Reference to arbitration and arbitability depends upon the existence of an arbitration agreement, and not upon the question whether it is a civil dispute or commercial dispute. There can be arbitration agreements in non-commercial civil disputes also."- para. 5

Saturday, July 24, 2010

Linklaters: Fiscally Transparent Entities

In my previous post I had discussed one of the findings in Linklaters (one relating to S. 9 and territorial nexus). In this post I shall discuss the finding in linklaters with regard to treaty benefits extended to fiscally transparent entities. The case is extremely important in this respect due to the absence of any specific adjudication on this point in India and very few in other jurisdictions.

The fundamental question before the tribunal was whether the partnership firm (linklaters LLP) which is treated as a fiscally transparent entity in the UK but is taxable as a separate entity in India under the Income Tax Act, 1961 eligible for the India UK treaty benefits. Before discussing the findings of the tribunal it is important to briefly elucidate on why this issue had arisen at the first place. Art. 1(1) of the India UK treaty stipulates that the convention shall apply to “persons who are resident of one or both the contracting states”. Further, Art 3(2) stipulates that a “partnership firm” which is a taxable unit in India shall be “treated as a person” for the purposes of the India UK treaty. It is very clear from the aforementioned provisions that a partnership firm is treated as a person under the impugned treaty. Thus, the only point that needs to be established for a partnership firm to avail treaty benefits is to essentially show that it is a resident of atleast one of the contracting states. For this purpose Art. 4(1) is important and it reads as under:

For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

On the basis of this provision the question that the tribunal had to address inorder to answer the larger question of treaty benefits was whether Linklaters meets the test embodied under art.4(1) of the treaty. The tribunal answering in favour of the assesse held that fiscally transparent entities or specifically partnership firms are entitled to treaty benefits. In reaching this conclusion the tribunal adopted two distinct lines of reasoning.

The first line of reasoning was primarily based on the contextual interpretation of art.4(1) of the treaty. The tribunal after citing several authorities on the interpretation of tax treaties stated that if the literal interpretation of a provision in a treaty leads to unreasonable results, the courts or tribunals should resort to contextual interpretation. In this case if art. 4(1) was to be interpreted literally then linklaters would not have qualified as a resident of UK as the income of the firm was taxed at the hands of the firm and the firm was not taxed per se in the UK (resident country). This interpretation in the tribunal’s opinion and correctly so would have been unreasonable as even though there would be no juridical double taxation (same entity taxed twice), there would in substance be an economic double taxation (same income taxed twice). As a result the tribunal adopted a contextual reading of art.4(1) and held that test embodied under the said article was that the “income of the person should be subjected to residence based taxation on account of some locality related attachment” in that contracting state. The following observations are apposite:

“Viewed in the light of the detailed analysis above, in our considered view, it is the fact of taxability of entire income of the person in the residence state, rather than the mode of taxability there, which should govern whether or not the source country should extend treaty entitlement with the contracting state in which that person has fiscal domicile. In effect thus, even when a partnership firm is taxable in respect of its profits not in its own right but in the hands of the partners, as long as entire income of the partnership firm is taxed in the residence country, treaty benefits cannot be declined.”

The second line of reasoning adopted by the tribunal proceeded on the premise that the actual payment of tax in one of the contracting states is not a condition precedent to avail the benefits of the tax treaty in the other contracting state. In light of this principle the tribunal held that the test laid down under art.4(1) is embodied to ascertain the fiscal domicile of an person (see heading to art.4), hence it is sufficient to show that the resident state has a right to tax the income of the partnership firm irrespective of the fact whether such a right is exercised by the resident state. The following observations are apposite in this regard:

“In our humble understanding, as long as de facto entire income of the enterprise or the person is subjected to tax in that tax jurisdiction, whether directly or indirectly, the taxability test must be held to have been satisfied. Of course, the other possible approach to such a situation is that as long as the tax jurisdiction has the right to tax the entire income of the person resident there, whether or not such a right is exercised, the test of fiscal domicile should be satisfied.”

In my view though the final conclusion reached by the tribunal on this point seems to be correct and will surely encourage professional services, the second line of reasoning requires further investigation as it is against the OECD report on partnerships.

Wednesday, July 21, 2010

Linklaters LLP: Territorial Nexus and International Tax Regime

In Ashapur Minichen ITAT Mumbai had confirmed that Ishikawajima-Harima ([2007] 288 ITR 408) does not continue to be good law in light of the retrospective amendment brought about by the Finance act, 2010.

In another case Linklaters LLP v. ITO the Mumbai ITAT has reiterated that the amendment made by the Finance Act, 2010 has negated the judgment in Ishikawajima. The important point though is that the court in Linklaters has stated that rendering of service in India is no more an essential ingredient for taxability of service in India u/s 9 of the IT Act, 1961. In other words the service can be taxed in India even if it is only “utilized” in India. However some of the observations in Linklaters can also be possibly interpreted to mean that “no territorial nexus” is required at all. For instance the court observes as under:

“It is fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems”- Para. 17

“ ………in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the understructure of the line of reasoning adopted by the honorable courts above”- Para. 18

An interesting point that emerges is again with regard to India’s compliance with the international tax regime. In Ishikawajima Harima the court had noted that territorial nexus (utilized+ rendered) is a well accepted international tax principle. The court had further noted that “having regard to the internationally accepted principle and DTAA, no extended meaning can be given to the words ‘income deemed to accrue and arise’ in India. Considering this observation and the subsequent ruling in Linklaters where the court holds that Ishikawajima Harima is not good law, it is submitted that the impugned amendment in the Finance Act, 2010 is against well accepted international principles. However, this is subject to an investigation whether at the first place the concept of territorial nexus as suggested in Ishikawajima Harima (utilized+rendered) is indeed a well accepted international tax principle.
India’s compliance with the international tax regime has been a matter of previous discussion on this blog here. A further analysis of linklaters and Ashapur is available on the legal developments blog here and here.

Wednesday, July 14, 2010

Introduction of the Controlled Foreign Corporations Regime in India: Necessity and Limitations

In an expedition to enlarge the scope of taxation of Residents, the revised discussion paper on the Direct Tax Code has yet again instituted a platform for debate with the introduction of taxation for Controlled Foreign Corporations( hereinafter CFC ). On an ongoing debate the legal fraternity has been divided amongst those who opine that India does not still require such a change as they believe in the existence of two different and distinct legal entities; those incorporated within and those incorporated outside the country. On the flipside others propagate that the Revenue is suffering losses as the recent trend shows an increase in outward investment, thereby making it necessary to introduce such laws for taxation. In my opinion there is a necessity to examine the proposal as laid down under the DTC, secondly to put forward the shortcomings of the proposal and finally to determine whether India has adhered to the principles recognised by most developed jurisdictions for taxation of the CFC’s.

In the Indian context, Controlled Foreign Corporations are understood as Companies which have been incorporated abroad, in countries with low tax jurisdictions, controlled directly or indirectly by Residents in an attempt to accumulate income without having to pay tax in India. It can therefore be concluded that such a structure is an added method for legally avoiding the payment of taxes in India.

The present proposal can be seen as yet another attempt by the Revenue to overcome the recognition given to the principle of Tax Avoidance in Azadi. It has sought to tax the Resident controlling such a Foreign Corporation on the passive income earned by the same. Furthermore in order to check the deferral of taxes from dividend earned by the CFC’s which are not distributed in India to the shareholders, the DTC(Chapter 8) proposes to tax such dividends as deemed dividend from the Foreign Corporation. The effective test laid down under the DTC is the ‘place of effective management’ of the corporation which is an internationally recognised principle for determining the residence of the Corporation. The DTC defines the term ‘place’ as being the country in which the ‘ key management’ and ‘commercial decisions’ are made for the ‘entity as a whole’. Therefore in substance it widens the ambit of residence of a Foreign Company if it is managed wholly or partially in India unlike the present law which limits a Foreign Corporation liable to tax only if the management and control are wholly in India (s.9 Income Tax Act, 1961). Further the DTC lays down a two-fold test for determining the Place of effective management under Schedule 10 of the code-

(i) The place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or

(ii) in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.”

In order to understand the true nature of the applicability of laws governing CFC’s, it is necessary to analyse the limitations of the provisions relating to its induction within the tax structure. Pursuant to the above definition of place of effective management, there should essentially be a bracket which categorises the term ‘ routinely’( clause ii) in such a manner that no further room for interpretation is left. This would check a series of litigation which may arise subsequently. Furthermore the code should specify the ambit of passive income such that there is no ambiguity to the jurisdiction in which such an income arises. There should also exist provisions which specifically limit the applicability to only passive income and does not affect active income. Another issue which arises is in the definition of a Controlled Foreign Income. The DTC should encompass within the meaning of a CFC, structured requisites for determining what would constitute a CFC. By doing so it would thus prevent persons from interpreting the term to their advantage and avoiding tax. Since the concept of CFC’s is not yet developed in India and since this is the first composite legislation governing the same, it lays a higher burden on the drafters to fully analyse the benefits and the limitations, thereby structuring the legislation by according well defined definitions, explanations, exceptions and its effect on the DTA Agreements which India shares with several foreign jurisdictions.

Over the years the developed countries have extensively advanced several principles relating to the taxation of CFC’s as a result of which there has come to exist a set of uniform global principles which have been adopted. A glance at some of the provisions under foreign jurisdictions and the proposal under the DTC makes it evident that India needs to make its law more comprehensive. Illustrating further, most jurisdictions have adopted the principle of determining ‘control’ under the control/ ownership test where a definite percentage is specified which determines if such a corporation could be subject as a Controlled Foreign Corporation. Secondly most of these jurisdictions follow the 50% Shareholder test according to which a Corporation is taxed as a CFC only if 50% of its shareholders are residents of India or have voting power comprising 50%. Such a threshold ensures that there are no two ways in interpreting the provision. Most countries which have adopted this regime do not impose these provisions on Corporations which have their residence in countries with a high tax rate. Therefore it can be inferred that as long as there is bona fide intention for not evading tax, the Corporation will not be taxed. Further, certain exemptions are also granted in favour of these corporations such as the application of the De minimis rule which is prevalent in the UK and the U.S. whereby an exemption is granted only when no part of the gross income of the corporation exceeds a specific limit under the governing laws. In the case of the United States the limit is specified as 1 million dollars.

It is pertinent to take into account that the Indian law still needs to develop a lot further before it has a fully functional system to tax CFC’s. First and foremost the Government should take into consideration the necessity for such legislation. The justification given by the Government for instituting such a provision is that there is a trend for outbound investments which is causing the Revenue to incur losses as it is not being able to tax these entities. However it is vital to understand that a fundamental difference exists between being an economy which has advanced to making outbound investments on a large scale and an economy which is progressively increasing its outbound investments. India today largely depends on inward flow of funds; therefore such legislation would be highly premature. Some considerations are needed to be taken by the Government which largely consists in determining the functioning of the Indian market. Rather than inducting a premature legislation the Government should study the market pattern for a few years such that it is in a position to frame proper laws applicable to the Indian markets than making regular amendments to such provisions. This would be highly ineffective and would lead to a series of unnecessary litigations. A consequent effect of such law would prevent Corporations having Holding Companies in India which would largely affect Mergers and Acquisitions made by Indian Residents.

Concluding, the Government needs to prioritise the needs of the Indian market which would enable the advancement of the Indian economy. Arguendo, the Government should not enact a legislation justifying it as precautionary if there exists no proper framework for its governance. This would entail hardship on a number of Companies which are trying to develop and expand. Therefore a thorough understanding is necessary not only at the domestic level but also the impact on an International platform. Only then can a proper legislation can be brought into effect.

Tuesday, July 13, 2010

International Tax Regime: Mihir's Comments

In my previous post I had briefly discussed the international tax regime and India's compliance. Subsequently Mihir had posted a very interesting and informative comment. For the benefit of the readers I reproduce the same as a post. Here is the comment:

"the Courts in India have noted the existence of 'international tax law' from time to time. For instance, in CIT v. Vishakapatnam Port Trust 144 ITR 146, the AP High Court observed as far back as in 1983, "In view of the standard O. E. C. D. models which are being used in various countries, a new area of genuine 'international tax law' is now in the process of developing"

However, most of the Indian judiciary's reliance on 'international tax law' is really more of a reliance on decisions of foreign courts. For instance, the Pune Bench of the Tribunal has observed in Daimler Chrysler, "Undoubtedly, judicial precedents from judicial bodies abroad cannot have any binding value, but these precedents surely deserve due and careful consideration. This is a truly two way traffic now and not only that Indian judicial forums are taking note of and following the judicial precedents abroad, even the foreign judicial bodies are taking due note of judicial precedents from India… On the subject of using foreign judgments to achieve uniformity of interpretation, Lord Denning, in the case of Corocraft, said: 'If such be the view of the American courts, we surely should take the same view. This convention should be given the same meaning throughout all the countries who were parties to it'… The importance of uniformity of interpretation of expressions which are used in global treaty networks can thus hardly be overemphasized"

Arguably, perhaps, the last sentence of the quote above refers to customary international law

Sunday, July 11, 2010

International Tax Regime and India's Compliance

In this post I shall put forth some questions in regard to India’s compliance with the international tax regime. However before I proceed with any analysis three important questions needs to be addressed; firstly Is there any International tax regime, arguendo, does this regime qualify as international customary law and lastly if there exists a regime then what is the nature of such a regime.

These questions have been a matter of intense debate and controversy over the years amongst leading scholars and tax practitioners. One of the leading scholars H. David Rosenbloom relies heavily on the archaic state of cross border transactions (anecdotal evidence) to argue that international tax regime is an “imaginary” and “utopian” idea. He argues that due to the varying socio-economic situation of states, it is impossible to imagine that all states will adopt the same rules of taxation (See H. David Rosenbloom, International Tax Arbitrage and the “International Tax System,” 53 TAX L. REV. 137, 166 (2000); See also Nancy H. Kaufman, Fairness and the Taxation of International Income, 29 LAW & POL’Y INT’L BUS. 145, 148 n.23 (1998)). Per Contra, Reuven Yonah relies on experiences of various countries but primarily the United States to argue that indeed an “international tax regime” does exist ( Reuven S. Avi Yonah INTERNATIONAL TAX AS INTERNATIONAL LAW (Cambridge, 2007)). Let us assume for the purposes of this post that Reuven is correct.

Now, I shall move to the second question that I had outlined above i.e. does this regime qualify as international customary law. Simply put, an international rule qualifies as customary international law if the states practice the rule (state practice) and they do so under the notion of a legal obligation (opinio juris). Reuven agrues that international tax regime does indeed qualify to be customary international law. Reuven reasons that though the international tax regime is spread over myriad of bilateral treaties, they incorporate harmonized rules as they are based on primarily the UN or the OECD model tax treaty. To illustrate this Reuven investigates the rules relating to Jurisdiction to tax, non discrimination (Mihir’s article on this blog on non discrimination) and transfer pricing and concludes that these rules are primarily the same or atleast have the same underlining principles across all the bilateral tax treaties. Reuven also discusses some of the legislative and policy changes in the US and how the US found it difficult to adopt certain rules which were against basic international principles; hence recognizing the presence of a harmonized international tax regime.

But merely putting forth an argument that an international tax regime exists and it qualifies as customary international law is not enough. Having established both these points it is imperative now discuss the nature of international tax law. Reuven points out that the nature of the international tax regime is broadly based on two principles namely single tax principle and the benefits principle. Single tax principle postulates that an income should be taxed only once (no less and no more). In other words both double taxation and double nontaxation is undesirable under the international tax regime. On the other hand the benefits principle stipulates that the active income (business income) should be taxed at source and the passive income (investment income) should be taxed at residence.

In light of this background we need to ponder upon the question, whether India has complied with the above discussed international tax regime. Let us take a contemporary example to further discuss this issue. The first draft of the DTC proposed that in case of a conflict between the tax treaty and domestic tax law whichever came latter in time shall prevail (“latter in time” doctrine). This was a massive divergence from the current position under the income tax act, 1961 wherein in case of a conflict between the tax treaty and domestic law whichever is beneficial prevails. Although, the revised direct code proposes to restore the current position of law, it also stipulates that treaty provisions can be overridden in cases when the provisions relating to GAAR and CFC are invoked. The exceptions to when a treaty can be overridden are too wide (see the discussion on GAAR provisions here and here) and it is submitted that if that be the case then India certainly does not recognize any international tax regime, leave alone complying with the principles embodied therein. One may argue that the correction in the revised tax code i.e. the restoration of the “beneficial” doctrine was a manifestation of India recognizing its international obligation, but in my view the correction in the code was made based on pragmatic economic consideration (after the release of the first code it was feared that there would be a heavy outflow of foreign capital) and not on any international legal obligation.

Concluding, whether India has complied with the international tax regime (if there exists one) needs closer scrutiny. Nevertheless I have attempted to argue in the course of this post that there exists a prima facie case that India does not recognize any so called “international customary tax law”.

Friday, July 9, 2010

The Right to Information Act and the National Law Schools

Every year, teachers in the National Law Universities (NLUs) would teach their students two landmark judgements in Indian Constitutional Law:

Bennett Coleman v UoI where the court held:

"The freedom of speech includes within its compass the right of all citizens to read and be informed."

State of UP v. Raj Narain [The case is a prelude to the Emergency and is also taught, I believe, as a part of the course on Law of Evidence], where the court held:

"In a government of responsibility like ours, where all the agents of the public must be responsible for their conduct, there can but few secrets. The people of this country have a right to know every public act, everything, that is done in a public way, by their public functionaries. They are entitled to know the particulars of every public transaction in all its bearing. The right to know, which is derived from the concept of freedom of speech, though not absolute, is a factor which should make one wary, when secrecy is claimed for transactions which can, at any rate, have no repercussion on public security. To cover with veil secrecy the common routine business, is not in the interest of the public. Such secrecy can seldom be legitimately desired. It is generally desired for the purpose of parties and politics or personal self-interest or bureaucratic routine. The responsibility of officials to explain and to justify their acts is the chief safeguard against oppression and corruption."

Such being the importance of the right of citizens to know, it would do well to look into how the NLUs have respected this right. But first, something about the Right to Information Act, 2005 ("RTI Act" or "Act").

The RTI Act received presidential assent on 15 June 2005. S. 1(3) of the Act provides that certain provisions of the Act would come into force at once and other provisions would become effective on the 120th day of the enactment. S 2(h) defines public authorities to include any authority or body or institution of self-Government established or constituted by any law of Parliament or by any law of a State Legislature. Surely, all the NLUs have been established through state enactments and hence are within the purview of "Public Authority".

Section 4 of the Act provides: [pardon the lengthy quote]

"4. (1) Every public authority shall— a) maintain all its records duly catalogued and indexed in a manner and the form which facilitates the right to information under this Act and ensure that all records that are appropriate to be computerised are, within a reasonable time and subject to availability of resources, computerised and connected through a network all over the country on different systems so that access to such records is facilitated;
b) publish within one hundred and twenty days from the enactment of this Act,— (i) the particulars of its organisation, functions and duties; (ii) the powers and duties of its officers and employees; (iii) the procedure followed in the decision making process, including channels of supervision and accountability; (iv) the norms set by it for the discharge of its functions; (v) the rules, regulations, instructions, manuals and records, held by it or under its control or used by its employees for discharging its functions; (vi) a statement of the categories of documents that are held by it or under its control; (vii) the particulars of any arrangement that exists for consultation with, or representation by, the members of the public in relation to the formulation of its policy or implementation thereof; (viii) a statement of the boards, councils, committees and other bodies consisting of two or more persons constituted as its part or for the purpose of its advice, and as to whether meetings of those boards, councils, committees and other bodies are open to the public, or the minutes of such meetings are accessible for public; (ix) a directory of its officers and employees; (x) the monthly remuneration received by each of its officers and employees, including the system of compensation as provided in its regulations; (xi) the budget allocated to each of its agency, indicating the particulars of all plans, proposed expenditures and reports on disbursements made; (xii) the manner of execution of subsidy programmes, including the amounts allocated and the details of beneficiaries of such programmes; (xiii) particulars of recipients of concessions, permits or authorisations granted by it; (xiv) details in respect of the information, available to or held by it, reduced in an electronic form; (xv) the particulars of facilities available to citizens for obtaining information, including the working hours of a library or reading room, if maintained for public use; (xvi) the names, designations and other particulars of the Public Information Officers; (xvii) such other information as may be prescribed; and thereafter update these publications every year; c) publish all relevant facts while formulating important policies or announcing the decisions which affect public; d) provide reasons for its administrative or quasi-judicial decisions to affected persons.
(2) It shall be a constant endeavour of every public authority to take steps in accordance with the requirements of clause (b) of sub-section (1) to provide as much information suo motu to the public at regular intervals through various means of communications, including internet, so that the public have minimum resort to the use of this Act to obtain information.
(3) For the purposes of sub-section (1), every information shall be disseminated widely and in such form and manner which is easily accessible to the public.
(4) All materials shall be disseminated taking into consideration the cost effectiveness, local language and the most effective method of communication in that local area and the information should be easily accessible, to the extent possible in electronic format with the Central Public Information Officer or State Public Information Officer, as the case may be, available free or at such cost of the medium or the print cost price as may be prescribed.
Explanation.—For the purposes of sub-sections (3) and (4), "disseminated" means making known or communicated the information to the public through notice boards, newspapers, public announcements, media broadcasts, the internet or any other means, including inspection of offices of any public authority."

[Emphasis not in the original]

In February 2008, an Office Memorandum was circulated by the Department of Personnel and Training. The Memorandum contained the guidelines for the officers designated as the Central Public Information Officers (Central PIO). These were to apply mutatis mutandis for State Public Information Officers. [The binding force of these guidelines may be disputed. In any case, these act as a model that the PIOs are supposed to emulate.] The Memorandum states:

"The Act makes it obligatory for every public authority to make suo-motu disclosure in respect of the particulars of its organization, functions, duties and other matters, asprovided in section 4 of the Act. The information so published, according to sub-section (4)of section 4, should be easily accessible with the CPIO in electronic format. The CPIO should, therefore, make concerned efforts to ensure that the requirements of the Section 4 are met and maximum information in respect of the public authority is made available on the internet."

[Emphasis not in the original]

Government Public Sector Undertakings like NTPC, ONGC, BHEL etc have dedicated pages for providing information as mandated by the Act. Even the web pages of various ministries contain such dedicated pages.

The above introductory was simply to place the issue of RTI in the context. The purpose of this post is to see to what level the NLUs have complied with one of the fundamental tasks of the public authorities under the RTI Act: publish information provided under S 4 in their websites.

Certain disclaimers:

(a) Two browsers, Mozilla Firefox and Internet Explorer, were used
(b) An Advanced Search was also made with the search string "Right to Information" to double check if the website of the NLU complied with the RTI Act.
(c) Thirteen NLUs have been considered : NLSIU Bangalore, NALSAR Hyderabad, NUJS Kolkata, NUALS Kochi, GNLU Gandhinagar, NLU Jodhpur, NLUO Cuttack, RGNUL Patiala, RMLNLU Lucknow, NLU Delhi, CNLU Patna, NLIU Bhopal and HNLU Raipur.
d) Whether the NLUs were in substantial compliance of all the provisions of the Act is not discussed here. All that has been done is to see if the NLUs have at least procedurally complied with the RTI Act by publishing some information in their websites. The adequacy of the information published is outside the scope of this post.
e) The date and time when each website was last visited is mentioned at the end of the post.

Compliance by the NLUs:

Each institution's website has been perused. Following are the results of such perusal:

NLUs in Compliance:

NALSAR Hyderabad, NLSIU Bangalore, GNLU Gandhinagar, RMLNLU
[the wesbite contains merely the contact details of the PIO and the Appellate Authority] and NLU Delhi have separate pages for Right to Information Act.

NLUs not in Compliance:

NLIU Bhopal and CNLU Patna have links titled "Right to Information" or "RTI" but the links don't work. Rest of the NLUs are not in compliance with the Act. The NLUs not in compliance are:

  1. NUJS Kolkata
  2. NUALS Kochi
  3. NLU Jodhpur
  4. NLUO Cuttack
  5. RGNUL Patiala
  6. HNLU Raipur
  7. NLIU Bhopal [RTI link doesn't work]
  8. CNLU Patna [RTI link doesn't work]
I sincerely apologise if the above NLUs have actually given the information mandated by the Act in their websites and I have missed noting it in this post. If not, it is kindly requested of the NLUs to practise what they preach about compliance with law.

List of NLUs websites/ their RTI pages:

1. NLSIU Bangalore:, last visited at 0754 hrs on 09.07.2010

2. NUALS Kochi: www,, last visited at 0757 hrs on 09.07.2010

3. NUJS Kolkata:, last visited at 0756 hrs on 09.07.2010.

4. GNLU Gandhinagar:, last visited at 0759 hrs on 09.07.2010

5. NLU Jodhpur:, last visited at 0801 hrs on 09.07.2010

6. NLUO Cuttack:, last visited at 0803 hrs on 09.07.2010

7. RGNUL Patiala:, last visited at 0803 hrs on 09.07.2010

8. RMLNLU Lucknow:, last visited at 0805 hrs on 09.07.2010 [the wesbite contains merely the contact details of the PIO and the Appellate Authority]

9. HNLU Raipur:, last visited at 0810 hrs on 09.07.2010

10. NLIU Bhopal: last visited at 0811 hrs on 09.07.2010 [link titled "RTI" doesn't work]

11. CNLU Patna: last visited at 0812 hrs on 09.07.2010 [link doesn't work]

12. NALSAR Hyderabad:, last visited at 0823 hrs on 09.07.2010

13. NLU Delhi:, last visited at 0823 hrs on 09.07.2010.

Monday, July 5, 2010

Doctrine of Mutuality

In CIT v. Common Effluent Treatment Plant Association the Bombay High Court has reiterated that if an association satisfies the norm of mutuality in respect of some receipts contributed by its members it does not necessarily lead to the conclusion that all the activities of the association satisfies the test of mutuality. I say reiterated because the same principle of law had been enunciated by the Gujrat High Court in Sports Club of Gujrat v. CIT ((1988) 171 ITR 504) .

Before discussing the facts and ruling of the Bombay High Court, it is necessary to briefly elucidate on the Doctrine of Mutuality. The doctrine of mutuality revolves around the hypothesis that “No man can trade with himself’. For e.g., a mutual society, say a club generates a surplus after providing certain privileges such as accommodation, refreshments etc. to its members. This surplus of receipts over expenditure cannot be deemed to be income on the ground of doctrine of mutuality as the club receives the funds from its members and uses it to provide certain privileges to the same members (CIT v. Bankipur Club Limited [ (1972) 82 ITR 831]). In Chelmsford Club v. CIT, the Supreme Court propounded the following tests which would establish mutuality:

(i) The contributors to the fund are the same persons who are also the recipients from the fund.

(ii) The entity is incorporated only for the convenience of the members i.e. the object should not be to earn profit.

(iii) There is an impossibility that the contributors would derive profit from an activity where they are the contributors as well as the recipients of the funds.

In Common Effluent the assesse was an association formed for the purpose of setting up an effluent treatment plant for the members of the assesse who ran industrial units. The income of the assesse consisted of the contribution made by the members for setting up of the effluent plant. The assesse had surplus of receipts over expenditure i.e. the assesse collected more funds than what was needed. The main purpose for maintaining such a surplus as contended by the assesse was to meet any unforeseen circumstances. The assesse further invested the surplus funds in a bank as fixed deposits. In light of this background two issues had arisen before the court, (i) whether the surplus of receipts over expenditure for the purpose of setting up and maintaining the effluent treatment plant is exempt from income tax on the principle of mutuality and (ii) whether the income generated from bank fixed deposits is exempt from tax on the principle of mutuality.

The first question was answered in favour of the assesse. The court relying on Chelmsford held that the surplus income held by the assesse was solely for the purposes of providing common effluent facility to its members and hence was exempt from tax on the principle of mutuality. However, the court answered the second question in favour of the revenue. On this question the court concluded that the interest that is generated on investment of the surplus funds in fixed deposits is not income from the contribution of the members instead it is an income derived from a third party (in this case a bank). The assesse had put forth an interesting submission pursuant to the second issue. The assesse contended that as per S. 35(1) of the Bombay Trust Act, 1950 it was legally mandated to invest the surplus money as deposits in a bank. In essence the contention of the assesse was that the investment made as fixed deposits was a statutory obligation and was not tainted with commerciality i.e. the purpose was not to derive profits. In contrast the court correctly held that the Bombay Trust Act only mandated deposits and not “fixed deposits”. The court further opined that the purpose for investing in “fixed deposits” was to earn interests which would not be available on moneys maintained in ordinary, current or savings account; hence the investment was a prudent commercial decision. In arguendo, the court while relying on the Supreme Court judgment Totgars Cooperative Sale Society Limited v. ITO held that even if their was a statutory obligation to deposit the surplus as fixed deposits, the interests derived from the same would be chargeable to tax under the head income from other sources. However, as the court correctly noticed the question in Totgars was in relation to deduction u/s 80P of the IT Act, 1961 and not on the principle of mutuality.

Thursday, July 1, 2010