Bombay HC decision in Clifford Chance v. DCIT: Tax liability of non-resident for services rendered outside India but utilized inside India

The Times of India has a report on a decision of the Bombay High Court in Clifford Chance v. DCIT ruling that “… foreign law firms, even though working as solicitors for multinational corporations with operations in India, will pay tax only in those countries where they give legal advice and not in India…” The full report can be accessed here.

The decision itself is available here. According to ITAT online, the decision held that “in accordance with the judgment of the Supreme Court in Ishikawajima Harima 288 ITR 408 a non-resident is taxable on income for services only if the services are rendered within India and are part of a business or profession carried on by such person in India. Both the above conditions have to be satisfied simultaneously.”

It is interesting to note that an earlier decision of the Bombay High Court in CIT v. Siemens AG has held, “the judgment of the Supreme Court in Ishikawajima Harima 288 ITR 408 (SC) has been overcome by the Explanation to s. 9 inserted by the FA 2007 which provides that income from royalty paid by a resident would be deemed to accrue in India even if the recipient has no PE…” The Siemens decision is available here.

The latest decision appears to raise an important issue as to the scope of the explanation to Section 9 inserted by the Finance Act, 2007. How far does the amendment actually overcome Ishikawajima-Harima? It appears that at least some part of the Supreme Court decision is still the law of the land despite the later amendment.

A detailed post analyzing these judgments will follow shortly.

(Update: See this post for the more detailed note)

ACIT v. Bhaumik Colour: Tribunal Special Bench on 'deemed dividend' under Section 2(22)(e)

In ACIT v. Bhaumik Colour Pvt. Ltd., a Special Bench of the Income Tax Appellate Tribunal resolved the conflict between two prior Tribunal decisions (Nikko Technologies and Seamist Properties) over the correct interpretation of Section 2(22)(e) of the Income Tax Act.

The following is a summary provided by ITAT online:

"U/s 2 (22) (e), deemed dividend can be assessed only in the hands of a person who is a “shareholder” of the lender company… The expression “shareholder” in s. 2 (22) (e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of s. 2(22) (e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of Sec. 2(22) (e) will not apply."

The decision (which is available here) is based on the legislative history of the provision in question, and traces the history of Section 2(22)(e) right from the 1922 Act to the 1988 amendments.

The relevant part of Section 2(22)(e) of the Income Tax Act reads as follows:

(Dividend includes) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31-5-1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest…

In the case before the Special Bench, the assessee B had taken a loan from U. Both B and U were private limited companies. B was not a shareholder of U. However, B and U had a common shareholder N. N was a trust holding 20% shares (and therefore a substantial interest) in B and 10% shares in U. According to the view taken by the revenue authorities, the payment from U to B (loan taken by B from U) was a loan covered under the second limb of Section 2(22)(e) under the words “or to any concern (read B) in which such shareholder (read N) is a member or a partner and in which he has a substantial interest. Thus, the issue was whether N was covered within the scope of the words “such shareholder” in the Section.

The assessee contended that the shares were held in the name of three trustees for and on behalf of N. There were 5 beneficiaries of the trust, and none of the beneficiaries were also trustees. The trustees of N thus held the shares as legal owners; they were not beneficial owners. It was contended that the words “such shareholder” meant that the holder of shares must be both the legal as well as the beneficial owner of shares. Two questions were referred to the Special Bench as follows:

1. Whether deemed dividend u/s 2(22)(e) can be assessed in the hands of a person other than a shareholder of the lender? In other words, could the payment be assessed in the hands of B as opposed to N?
2. Whether the words “such shareholder” occurring in Section 2(22)(e) refer to a shareholder who is both the registered (legal) shareholder as well as the beneficial shareholder?

Counsel for the assessee placed reliance on the changes in the wording of the Income Tax Act over the years. The relevant provision in the Income Tax Act, 1922 was changed in the Income Tax Act, 1961 by Section 2(22)(e). It was contended that the words “such shareholder” must necessarily be read with the word “shareholder” when it occurs for the first time in Section 2(22)(e). When it occurs for the first time in the section, the language is “to a shareholder, being a person who is the beneficial owner of shares”. Counsel contended that while ‘shareholder’ would mean registered shareholder, the qualification “being a person who is the beneficial owner of shares” would mean that the term refers to a person who is both the registered shareholder as well as the beneficial shareholder.

The Special Bench considered the fact that under the corresponding provision in the 1922 Act, it was a precondition that the shareholder must be a registered shareholder. It held, “The expression ‘shareholder’ has been interpreted under the (relevant provision of the) 1922 Act to mean a registered shareholder… It is a principle of interpretation of statutes that where once certain words in an Act have received a judicial consideration in one of the superior courts, and the legislature has repeated them in a subsequent statute, the legislature must be taken to have used them according to the meaning which a court of competent jurisdiction has given them.” Thus, “shareholder” means ‘registered shareholder’ and “being a person who is the beneficial owner of shares” means ‘beneficial shareholder’. Therefore, “shareholder, being a person who is the beneficial owner of shares” must mean that the person was a registered as well as a beneficial shareholder. The words being a person who is the beneficial owner of shares were read not as explaining the term ‘shareholder’, but as limiting the application of the section to a certain set of shareholders. In other words, the Bench read the words to mean ‘shareholder, also being a person who is the beneficial owner of shares’. As such, for Section 2(22)(e) to apply, the person must be both the registered as well as the beneficial shareholder.

The second of the two questions was answered accordingly in favour of the assessee. The first question was therefore not required to be answered in the case of the assessee. However, the Tribunal decided to answer the question nonetheless, as that question remained important in several other cases. For instance, let us assume that N was both the legal as well as the beneficial shareholder. Now, will the loan be taxed I the hands of B (who actually received the amount) or in the hands of N (who is the shareholder and must be deemed to have received the payment as dividend)? The complexity arises because ordinarily dividend is payable only to the shareholder; in the case of the deemed dividend under Section 2(22)(e), the payment to even a non-shareholder is treated as dividend. Relying on a decision of the Rajasthan High Court in CIT v. Hotel Hilltop 217 CTR 527 (Raj), the Tribunal held “deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder”. The rationale for this is that the deemed dividend provisions are intended to account for the payments made by a company to another concern for the interest of the shareholders. The provisions were introduced on the presumption that the payments which were treated as deemed dividend under the clause would ultimately be available to the shareholders of the lending company. Further, the very concept of ‘dividend’ would mean that such payments should be taxed in the hands of the shareholder and not in the hands of the concern to which the payment was actually made.

Two PILs after the Mumbai Attacks

Issues arising out of the Mumbai attacks have made their way to the Supreme Court. A few days ago, Law and Other Things reported that Mr. Soli Sorabjee had filed a Writ Petition praying for directions to the Government to improve the security apparatus in the country, maintain a centralized system of intelligence, etc. The petition can be accessed here (thanks to Law and Other Things for making this available).

Another Petition has been filed by Advocates Shekhar Devasa and K.V. Dhananjay which names the Union of India as well as several news channels as Respondents. The Petition seeks a direction to the Government to restrain the news channels from “facilitating or relaying communication from suspected or apprehended terrorists to their viewers in India forthwith unless (the Government) consents in advance to such relaying of communication…” and requests the Supreme Court to pass orders “to safeguard public peace against erosion by the business of the (news channels).” I would like to thank Mr. Dhananjay for making the petition available; it is linked here.

Both the Petitions rely to some extent at least on the expanded meaning of the right to life under Article 21 of the Constitution of India. I am unsure about whether the Court will actually issue any directions in any of the petitions – the government is not particularly likely to adopt a combative posture at least on Mr. Sorabjee’s petition.

The second Petition raises an interesting argument relating to the fundamental right to peaceful existence of citizens on the basis of a conjoint reading of several provisions in Part III of the Constitution. Also, if the Court hears this one on the merits, we may well see debates over the freedom of the press vis-à-vis national security. I am quite skeptical as to whether the Court will pass the orders prayed for, but the broader question is interesting – can the government pass a directive preventing a news channel from broadcasting a call it receives from a terrorist without such a directive amounting to an unreasonable restriction on the freedom of speech and expression? The petition draws the following analogy:

If a citizen of our country were to install a loudspeaker in a crowded market and relay messages originating from one or more banned terrorist outfits, say, from the Pakistan-Occupied-Kashmir (POK), he clearly commits the offence of aiding and supporting an assault upon the State and its people even if the content of the message itself is not inflammatory per se. The laws governing such conduct do not apply with equal force to the registered media and the media is subject to a lesser restriction in the hope of furthering democratic goals of facilitating free exchange of views and opinion. However, the liberty confirmed upon the media in our country has resulted in them practically abandoning much discretion in the matter of reporting upon terrorism and competitive pressures have virtually pushed them to compete for ‘scaring the most’.

(Please note that this in NOT the only argument raised by the Petitioners; see the petition at the above link for a fuller description of the arguments.)

I invite the opinions of readers on this aspect, as also on the aspect of whether the Court would be justified in passing the order prayed for.

(Meanwhile, also see this rather strong post by Aditya Swarup over at The Social Blog criticising Mr. Sorabjee's petition on 'excessive activism' grounds. While I do not agree with everything he says in it, it is an interesting read.)

Does Kasab deserve a defence?

A Bar Association in Mumbai recently passed a resolution asking its members not to represent the arrested terrorist Kasab. This has led to a discussion on several blawgs about the ethical issues involved. Similar issues were raised in the Manu Sharma (Jessica Lal murder) case, where Mr. Ram Jethmalani appeared for Manu Sharma.

Mr. Jethmalani’s views on the Kasab controversy are found here. A short extract:

Jethmalani said a lawyer should advise his client on the basis of facts. “The lawyer's duty is to say that on the facts I find no defence. The man is guilty on his own confession... Unless he instructs the lawyer, the confession was obtained by some force or fraud or whatever, which is very unlikely. A lawyer should be able to tell him (the terrorist) that either hanging or life imprisonment is your option. If you want me to tell the court that you should receive life imprisonment I am prepared to do my best”

Law and Other Things carries a discussion on the issue here. Also relevant is an interesting piece on the leading international law blog Opinio Juris, titled “Why I am advising Radovan Karadzic”. (Karadzic, of course, is accused of genocide in Bosnia, and was on the run for several years until his recent capture). Incidentally, a group of senior criminal lawyers in Mumbai had - each acting individually - decided against representing the accused in the 7/11 Mumbai train blast case.

Digest of recent Income-tax Cases

The latest digest of recent income-tax cases decided by Courts and Tribunals in India is available on the website of the Mumbai ITAT Bar Association. The Digest is linked here.

Another digest of a few recent international taxation cases is available on the website of the Chamber of Income tax Consultants, linked here.

ICSID: Exercise of Inherent Powers in dealing with 'bias'

An ICSID Tribunal recently considered an interesting – and potentially uncomfortable – issue relating to bias and the inherent powers of an arbitral tribunal.

In the matter between Hrvatska Elektroprivreda v. The Republic of Slovenia, it came to the knowledge of the Claimant that one of the counsel retained by the Respondent (Mr. David Mildon QC) was a door tenant in the prestigious Essex Court Chambers, and the President of the Tribunal (Mr. David Williams QC) was also a door tenant in the same Chambers. The President of the Tribunal clarified that his relationship with counsel was solely because of the fact that they were door tenants in the same Chambers, and that he did not anticipate any difficulty in acting objectively and impartially. The Claimant was not particularly satisfied, and requested that the Tribunal pass an order directing the Respondents to not retain Mr. Mildon in the proceedings.

The two issues which the Tribunal had to consider were (a) whether the ICSID Tribunal had the power to order the respondent to not instruct a particular counsel, and (b) whether that power should be exercised in the particular case.

The Essex Court Chambers website notes the relationship amongst the door-tenants as follows:

“Chambers is not a firm, nor are its members partners or employees. Rather, Chambers contains the separate, self-contained offices of individual barristers, each self-employed and working separately. Indeed, (as in all specialist sets) individual Barristers within Chambers are commonly retained by opposing sides in the same dispute, both in litigation and arbitration. As well as acting on opposing sides, individuals regularly appear in front of other members acting as Deputy Judges or Arbitrators. Members of Chambers may be instructed individually or in a team to provide a wide range and level of expertise in both contentious and non-contentious work.”

It is safe to assume that given the strong reputation of both the President (Williams) and counsel (Mildon) there would be no apprehension of bias to an English lawyer. Further, the Essex Court Chambers are not a law firm. Nonetheless, complications were introduced by the fact that the Claimant was a company thoroughly unacquainted with the English legal system. Therefore, the apprehension of bias cannot be seen from the point of view of the English legal profession alone. The Tribunal therefore referred to the relevant International Bar Association guidelines, which state:

“While the peculiar nature of the constitution of barristers’ chambers is well recognised and generally accepted in England by the legal profession and by the courts, it is acknowledged by the Working Group that, to many who are not familiar with the workings of the English Bar, particularly in light of the content of the promotional material which many chambers now disseminate, there is an understandable perception that barristers’ chambers should be treated in the same way as law firms.”

One might have thought that the appropriate course would be for the President to step down, to pave the way for a new President to be appointed. However, neither of the parties wished for this to happen. In fact, the Claimant submitted that it had faith in the President and did not wish for the additional costs and delays which would be inevitable if the President stepped down, yet it wanted to avoid the appearance of impropriety. The main question therefore was whether the Tribunal could order a party to not retain particular counsel.

The Tribunal accepted that it was a fundamental principle that parties may seek such representation as they deem fit. Nonetheless, even fundamental principles “must give way to overriding exceptions”. And one such overriding exception was the immutability of the properly constituted Tribunal. Further, the Tribunal noted amongst other things that the Respondent had retained David Mildon QC after the composition of the Tribunal. The following passage highlights the concerns of the Tribunal:

“The Tribunal does not believe there is a hard-and-fast rule to the effect that barristers from the same Chambers are always precluded from being involved as, respectively, counsel and arbitrator in the same case. Equally, however, there is no absolute rule to opposite effect. The justifiability of an apprehension of partiality depends on all relevant circumstances. Here, those circumstances include, first, the fact that the London Chambers system is wholly foreign to the Claimant; second, the Respondent's conscious decision not to inform the Claimant or the Tribunal of Mr. Mildon’s involvement in the case,I4 following his engagement in February of this year, third, the tardiness of the Respondent's announcement of Mr. Mildon’s involvement and, finally, the Respondent's subsequent insistent refusal to disclose the scope of Mr. Mildon’s involvement, a matter of days before the commencement of the hearing on the merits. The last three matters were errors of judgment on the Respondent’s part and have created an atmosphere of apprehension and mistrust which it is important to dispel.”

Thus, while ordinarily parties must have a right to be represented by whomsoever they choose, in the instant case, considering that the conduct of the Respondent was not beyond reproach and considering the principle of the immutability of a properly constituted Tribunal, the Tribunal concluded that it should pass an order preventing Mr. Mildon from representing the Respondent. Further, the Tribunal noted that it had the inherent powers to preserve the integrity of the proceeding before it; and consequently passed an order preventing Mr. Mildon from taking any part in the proceedings. It appears clear, though, that under usual circumstances (where no blame or “errors of judgment” can be attached to the Respondent) it would be for the President to step down. The Claimant cannot (or should not be able to) argue that the President should stay and the opposing counsel should leave. It is to be hoped that this decision is not treated as authority for a broader proposition impinging upon a party’s right to legal representation under the guise of avoiding bias.

Bombay HC Vodafone Decision: Some thoughts on Section 9

Earlier on this blog, I had highlighted some of the observations of the Bombay High Court in the Vodafone case. In this post, I present some of my views as to why the transfer of shares of a company situated outside India in circumstances similar to the Hutch – Vodafone transaction cannot be deemed to be a sale of a capital asset situated in India.

In my opinion, the Court should have limited itself to the point on maintainability of the petition. Having reached the conclusion that the petition was not maintainable, the Court should not have gone ahead to observe that the transaction involved the sale of a capital asset situate in India.

[The Court observed that the capital gains in question arose out of the transfer of a capital asset situated in India, and was therefore chargeable under Section 9 (1) (i) of the Income Tax Act. For the facts which were the basis for the Court’s conclusion, see paragraph 155 of the judgment. In the following few paragraphs, I will outline a possible argument as to why the sale of shares of a company situated outside India cannot be deemed to be a transfer of a capital asset situated in India.]

1.

It is a well established principle in the law of property that one cannot pass a better title than one possesses. Further, ever since the decision in Salomon v. Salomon, it is well accepted that a company is a legal person and has an existence independent of its shareholders. A shareholder has no interest in the property of the company. In Guzdar v. CIT, the Supreme Court of India has held that there is nothing in Indian law that provides any basis whatsoever for the assumption that a shareholder who holds shares, holds any interest in the property of the company. Therefore, if ‘X’ holds shares in an intermediary company and that intermediary company owns a capital asset in India, it cannot be said that ‘X’ has a legal interest in the capital asset in India. Given that ‘X’ does not have a legal interest in the capital asset in India, the sale of shares of the intermediary company cannot amount to a transfer of a capital asset situate in India. In fact, a similar situation has already been considered by the Hon’ble High Court of Delhi in Carrasco Investments v. Special Director, Enforcement Directorate [1992] 2 Comp LJ 339, where the Court refused to categorize the sale of the shares of a parent company outside India as a sale of shares of the subsidiary company within India

2.

The only exception to this would be if the corporate veil was lifted over the intermediary company. The separate legal personality of a corporate body is well accepted in law, and the doctrine of lifting the corporate veil is only an exception to this rule. None of the requirements for this exception to come onto operation are fulfilled in the instant case. The simple fact that a set of companies function as a group is not sufficient in law to life the corporate veil between them: Adams v. Cape Industries plc., [1991] 1 All ER 929. The fact that a parent company holds even 100% of the shares of the subsidiary is not a ground for lifting the corporate veil between the parent and the subsidiary: In Re Acer Computers, (2004) 189 CTR 498 (AAR). For a detailed discussion of the law relating to lifting the corporate veil, see this earlier post.

3.

Arguments relating to ‘motive’ of the tax-payer are not sufficient to ignore the existence of a legal entity. merely because an otherwise legal action is taken because of a tax-saving motive, that in itself is not enough to lift the corporate veil and ignore the intermediate entity said to have been created for a tax-saving purpose. A corporation otherwise qualified should not be disregarded as a façade merely because it was purposely created and operated to gain tax benefits: Azadi Bachao Andolan v. Union of India, (2003) 263 ITR 707 (SC); Barber-Greene Americas Inc. v. Commissioner of Internal Revenue, (1960) 35 TC 365 at 383-384.

4.

The alleged economic ‘substance’ of the transaction cannot be looked at. It is not open to the Department to entirely ignore the form of a transaction based on an assessment of the “substance” thereof. This has been made explicitly clear by the Supreme Court in Azadi Bachao Andolan v. Union of India, while clarifying the decision of the Constitution Bench in McDowell v. CTO. It must now be regarded as well-settled that “The highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed… In doing so, he neither comes under liability nor incurs blame.” (See generally, Kanga, Palkhivala and Vyas). It is only the legal relation arising from a transaction that determines the taxability of a receipt arising from a transaction. The doctrine of looking at the substance and not the form of the transaction applies when there is a colourable or illegal transaction which has to be ignored. In the instant case, the transaction in question was perfectly legal. When the transaction itself is plain and admits of no ambiguity, there is no case for looking at the substance of the form ignoring the transaction. The actual transaction in the case involved the shares of a company, by a company, and to a company; all outside India. This legal reality cannot be ignored.

5

The subsequent transactions between Vodafone and the Indian group Essar cannot be looked at to determine the taxability of receipts arising under a prior transaction between Vodafone and Hutch. The subsequent transaction may at best indicate the economic substance of the prior agreement – it cannot alter the legal nature of the prior agreement. Further, the issue of the referral to the FIPB also cannot be used to determine the actual nature of the transaction, considering the clear submission that the referral was merely a precautionary step taken by Vodafone.

(Note: These are merely the possible lines of argument [on the issue of chargeability] in view of the judgment of the Bombay High Court in the case. Now, it is open to contend that as the decision rests on maintainability, the decision of the Court on the aspect of chargeability of the transaction is not conclusive. It seems that Vodafone is filing an appeal – it will be interesting to see whether the Supreme Court will decide to pronounce on the chargeability. Purely on the aspect of maintainability, however, it seems difficult to argue against the decision of the Bombay High Court. For a further discussion, see the comments of several readers on the earlier post.)

Bombay High Court decision in Vodafone: An initial analysis

This post mentioned that Vodafone had lost its case in the Bombay High Court. In the present post I will only highlight a few important conclusions of the Court (in Vodafone International Holdings v. Union of India and Asst. Director of Income Tax, Writ Petition No. 2550/2007) along with a few initial comments:

[Para 157]

Revenue has made out a strong prima facie case that the transaction entered upon by the Petitioner amounts to transfer of a capital asset and not merely a transfer simplicitor of controlling interest ipso facto in a corporate entity, especially in the light of the fact that the interest in Telecom License is jointly held with the Essar Group complied with the use of Brand & Goodwill and non-complete rights given by HTIL. There is a right to enter into Telecom Business in India, with a control premium.

[Para 159]

The Petitioner themselves have not disputed that the transaction involves transfer of controlling interest. If any transaction involves a transfer of controlling interest in a company or a group of companies, such a transfer has to be viewed both from the point of view of transferor and transferee. It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which, a transferee cannot acquire a controlling interest.

[Para 160]

…the purpose of transfer of its interest in HEL was to enable the Petitioner to acquire controlling interest in HEL…

• The Court seems to be advocating looking at the substance of the transaction over the form. A detailed discussion of McDowell and Azadi Bachao Andolan on this point would have explained the rationale of the Court better.

[Para 161]

Shares in themselves may be an asset but in some cases like the present one, shares may be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman Island Company, but the assets (as stated supra) situated in India. The choice of the Petitioner in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset.

• The terminology of “mode or vehicle” seems to be taking Indian tax law back to the pre-Azadi days.

[Para 162]

Prima facie, apart from the acquisition of controlling interest, the Petitioner has acquired other interests and intangible rights. The Petitioner accordingly became a successor in interest in the joint venture between HTIL and the Essar group and became a co-licensee with the Essar group to operate mobile telephony in India.

[Para 163]

It is an admitted fact that VEL (earlier HEL), a subsidiary of the Petitioner in which the Petitioner has acquired 67% interest, was a group company of HTIL and now a group company of the Petitioner. Any profit or gain which arose from the transfer of a group company in India has to be regarded as a profit and gains of the entity or the company which actually controls its, particularly when on facts, the flow of income or gain can be established to such controlling company (HTIL). In the present case, by reason of the transfer, the income accrued not to CGP, but to HTIL and was treated as profits of HTIL and accordingly was distributed to the share holders of HTIL in Hong Kong…

• This comes suspiciously close to lifting the corporate veil between entities of the same group. This result seems to be out of accordance with the common law position on group companies. See Adams v. Cape Industries, [1991] 1 All ER 929.

[Para 168]

The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act

• Again, substance prevails over form.

[Para 169]

Petitioner has willfully failed to produce the primary/original agreement dated 11th February, 2007…

[Para 170]

…Petitioner has not been able to demonstrate the show cause notice to be totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts…

[Para 177]

In the present case, the Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner was requested to produce certain documents for proper adjudication in the matter. One of the crucial documents required by the second Respondent was the primary agreement entered upon between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before second Respondent or even before us. Without the said agreement and other relevant documents, it will be impossible for us to find out the true nature of the transaction. Inspite of repeated demands by the Respondents, the same have not been produced, leaves us with no option but to draw an adverse inference against the Petitioner, since it clearly amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the Petitioner…

[Para 180]

When the Petitioner has challenged the constitutional validity of the Amendment to Sections 191 and 201 of the I.T.Act by the Finance Act, 2008, then the same must be in context of certain facts pleaded and proved by evidence in the form of documents on record and not in vaccum or in the abstract. The present Petition totally lacks particulars as to the nature of agreement dated 11th February, 2007 and all other agreements preceding or following the same entered into by HTIL and/or the Petitioner.

• This factor of non-production of the original agreement appears to have played a great role in the decision. In oral arguments, Mr. Parasaran, the ASG appearing for the Revenue, had stressed on this aspect a lot. However, it would perhaps have been better if the Court rested its decision on the ground that the authorities were entitled to fully look into the facts, instead of passing observations on the merits of the case.

An initial opinion:

I am still unconvinced that Vodafone deserved to lose on merits. Perhaps, the Court could have limited itself to deciding on grounds of maintainability. A writ petition against a show-cause can be sustained only if the notice is totally non-est. The Court could have simply stopped at saying that there was not enough material for it to come to that conclusion. Instead, the detailed discussion of the merits may render the decision legally untenable.

In an initial post on the arguments in the case, I said “While there appears to be some merit in the argument that the petition for quashing the show-cause notice is premature, it appears that the Court is unlikely to accept this plea either, particularly since detailed hearings were heard on the merits.” Perhaps, this factor – that the merits were argued in depth – induced the Court to express its opinion on the merits as such. My initial view however, is that those opinions on the merits may not be correct in law. A more detailed post explaining this will follow in a few days.

(Update: The judgment is now available on ITAT online here)

(Note: The detailed post is now available here)

Law and Other Things: What should the response be?

On the Law and Other Things blog, there has been some discussion about the impact of the political and legal fallout of Mumbai attacks. Another recent post titled “Diplomacy: The New Opium for the Masses” is the probably most hard-hitting post on that blog in this context, and makes for extremely interesting reading. It deals perhaps more with the “other things” part of that blog; nonetheless I mention it here both because of its contents (although I do not endorse them fully) and also because of its no-holds-barred attack on competing viewpoints. Here is an example – the first paragraph of the post:

“Some of you might have heard of virtual reality software (here is one example) where whoever signs up is given an avatar that does all the things that real people do and much more – buy property, set up businesses, entertain oneself, etc. All with one major difference. There, one can have the perfect fantasy life one aspires for but is unable to achieve in real life. It seems very much like the sort of world many of our news commentators live in today.”

Or another sample:

“Another brilliant analysis and suggestion comes from Sitaram Yechury (incidentally seconded by The Hindu and partly by John Cherian in Frontline) who blames the nuclear deal for our tragedy. How convenient. Never mind that these attacks have grown in intensity and their focus has expanded well beyond the borders of Kashmir long before the deal was even conceived... Is it any surprise then that Hamid Gul, the foremost defender of jihad, has embraced our communists?”

Also, the author does not hesitate to offer his solution:

“To paraphrase Churchill, we have repeatedly chosen dishonor over war. War has therefore now been thrust upon us. It is time to strike back.”

The full post is available here, and the comments to the post present strong counters to the author's views. Some other analytical pieces on the Mumbai attacks are linked on a page which can be accessed here.

The Mumbai Attacks and the link to Pakistan: Part II - some answers

(This is continued from Part I published earlier on this blog)

Questions of proof in international law are notoriously difficult. First and foremost, one needs to clarify the standard of proof involved. In order to establish a fact as true, must it be proved on a balance of probabilities, or must it be proved beyond reasonable doubt? Typically, the former pertains to civil cases and the latter to criminal cases.

The International Court of Justice (ICJ) decision in the Oil Platforms case (USA v. Iran) is helpful in understanding how questions of fact are treated under international law. The issue in that case was whether certain missile attacks in the Sea Isle City could be attributed to Iran. In that case, the Court, in describing certain evidence, used the phrase “highly suggestive, but not conclusive”. This suggests the application of a high standard of proof. More recently, the ICJ discussed the issue in the case between Bosnia and Serbia. The Court held that claims against a State involving exceptionally grave charges, must be proved by evidence that is, “fully conclusive”. However, this high standard was applied to the question of whether the respondent State was directly involved in genocide. On the question of whether the respondent State was responsible for “non-prevention” of genocide the court applied the standard of “proof of a high level of certainty, appropriate to the seriousness of the allegation,” a standard lower than that of “fully conclusive”. The judgment also suggests that the higher standard was applied because exceptionally grave charges were made against a sovereign State. For a more detailed discussion of the case, see this link.

Now, insofar as the question of the link to Pakistan is concerned, it is important to note that India has not accused the State of Pakistan of being directly responsible. India’s case seems to fall more into the category of accusing Pakistan of not doing enough to prevent the attacks – in that case, the matter as to whether there is a link to elements in Pakistan must be treated as one to be decided on a balance of probabilities. And on a balance of probabilities, even on the limited facts highlighted in Part I of this note, there is enough to suggest that groups within Pakistan were responsible. (Note that this in itself does not mean that the government of Pakistan was responsible for the attacks). A detailed analysis is likely to be incomplete as the investigation progresses; and I leave it to my readers to carry this analysis out.

More important is the second aspect – for a moment let us assume that the Lashkar-e-Toiba was in fact responsible for the Mumbai attacks. Two fresh questions will then appear:

• Can the acts of the Lashkar-e-Toiba be attributed to Pakistan?
• If not, what responsibility will Pakistan bear in relation to the attacks?

Typically, the actions of non-state actors can be attributed to a state if the non-state actors were acting under the control of the state. What, exactly, is ‘control’? In order to answer this question, one needs to consider the effect of three important judgments – Nicaragua (ICJ), Tadic (ICTY) and Bosnia (ICJ) judgment on genocide. These judgments are discussed in detail in an article by Professor Antonio Casesse in the European Journal of International Law (“The Nicaragua and Tadic cases Revisited in Light of the ICJ judgment on Genocide in Bosnia”, Vol. 18, Issue 4, EJIL, p. 649. The article can be accessed here.

I reproduce the abstract of the article:

“In its recent Genocide judgment, the International Court of Justice discussed the question of whether the acts of genocide carried out at Srebrenica by Bosnian Serb armed forces must be attributed to the Federal Republic of Yugoslavia (FRY), as claimed by Bosnia. It applied the ‘effective control’ test set out in Nicaragua, reaching a negative conclusion. The Court also held that the broader ‘overall control’ test enunciated by the International Criminal Court for the former Yugoslavia (ICTY) in Tadi did not apply, on two grounds. First, the test had been suggested by the ICTY with respect to the question of determining whether an armed conflict was international and not with regard to the different issue of state responsibility; secondly, in any case the test would have overly broadened the scope of state responsibility. The author argues that the ICTY admittedly had to establish in Tadi whether the armed conflict in Bosnia was internal or international. However, as no rules of international humanitarian law were of assistance for such determination, the Tribunal explicitly decided to rely upon international rules on state responsibility. The ICTY thus advanced the ‘overall control’ test as a criterion generally valid for imputation of conduct of organized armed groups to a particular state. The test was based on judicial precedents and state practice. In addition, the ICTY did not exclude the applicability of the ‘effective control’ standard, stating however that it only applied for the attribution to a state of conduct by single private individuals. Judicial decisions, even subsequent to Tadi, support the view that whenever conduct of organized armed groups or military units is at stake it suffices to show that the state to which they may be linked exercises ‘overall control’ over them, in order for the conduct of those groups or units to be legally attributed to the state. Hence, any sound critique of Tadi should not suggest that it dealt with a matter different from state responsibility. It should instead be capable of showing that state and judicial practice do not corroborate that test.”

The distinction between ‘overall control’ (Tadic) and ‘effective control’ (Nicaragua) is that in the latter case, there must be proof of control by the state over the specific actions involved. Overall control can be established by showing general control and guidance – there is no need to show that the specific occurrence was controlled by the State. In this regard, also see the commentary to Article 8 of the ILC Articles in State Responsibility. In my opinion, on the facts as they stand, it is next to impossible to show effective control of the state of Pakistan over the attacks. It is also extremely difficult to show overall control. The mere fact that the intelligence agency of Pakistan had in the past aided the Lashkar-e-Toiba is not proof of the fact that the agency exercises overall control at present. Thus, the attacks themselves cannot be legally attributed to Pakistan.

Does this mean, however, that Pakistan does not bear any responsibility? No. Pakistan does bear the responsibility of not allowing its territory to be used by non-state actors against another state. It is a basic principle of international law that although a state enjoys territorial sovereignty, that sovereignty includes an obligation to prevent use of one’s territory for activities against another state. In this connection, see UN Security Council Resolution 1373.

In other words, even if Pakistan is not responsible for the attacks, it is responsible for allowing its territory to be used for the attacks. In this regard, the following passage advocating a less stringent standard of proof from the Corfu Channel case (ICJ) is relevant:

“True, the mere fact that mines were laid in Albanian waters neither involves prima facie responsibility nor does it shift the burden of proof. On the other hand, the exclusive control exercised by a State within its frontiers may make it impossible to furnish direct proof of facts which would involve its responsibility in case of a violation of international law. The State which is the victim must, in that ease, be allowed a more liberal recourse to inferences of fact and circumstantial evidence; such indirect evidence must be regarded as of especial weight when based on a series of facts, linked together and leading logically to a single conclusion.”

The allegations of India are not that Pakistan was directly involved – India is only alleging that Pakistan did not do enough to prevent its territory being used by groups such as the Lashkar-e-Toiba to carry out the attacks. Given this factor, it is sufficient if India established the link to Pakistan merely on a balance of probabilities.

Conclusion:

• It may be difficult for India to prove that the state of Pakistan itself is responsible for the Mumbai attacks. In order to prove this, it appears that India will have to meet a very high standard of proof.
• However, insofar as India alleges that “elements in Pakistan” (not controlled by the state of Pakistan) are involved, the standard of proof is much lower. In my opinion, even if we look only at the available facts highlighted in my earlier post, India can easily satisfy this lower burden. In this light, the statements from Pakistan that there is “not sufficient evidence” are misplaced.
• This means that although Pakistan is not responsible for the attacks, it is responsible for allowing its territory to be used for the attacks. State Sovereignty includes – by necessary implication –an obligation not to allow a state’s territory to be used by non-state actors to carry out armed attacks against other states.

(Note: these posts here are not complete arguments for my conclusions, but are only intended to be a general framework)