• Notification Date: 06-11-2023
• Notification No: N/A

Recent SC rulings by ASG Venkatraman states Right Income Tax to be paid; No Tax Increase

The Supreme Court’s recent rulings on tax treaties and the classification of the licence fee paid by telecom companies as capital expenditure have affirmed the law and have not increased the quantum of taxes, confirmed by Additional Solicitor General (ASG) Venkatraman. 

“These judgments only affirm what is the right tax to be paid, (and) has not increased the taxes. Increasing taxes is not the role of the judiciary,” Venkatraman said. 

The ASG made the statement in the context of two recent judgments on income tax law by the Supreme Court (SC). In one judgment, the apex court ruled that international tax treaties cannot be given effect unless they are notified and woven into Indian law. In the second judgment, the SC ruled that annual payments made by telecommunication companies (telcos) towards licence fees must be considered capital expenditure and not revenue expenditure. 

Venkatraman further noted that it would be unfair to blame the government whenever a court ruling goes against the interpretation of an assessee (corporates). 

“Self-judgment by the assesses (companies) should not be held against the government. Assessees took their chances (by paying lower taxes). Now to come back and say that the government is wrong may not be correct. The government’s stand has always been consistent,” he said. 

Venkatraman appeared for the Income Tax Department in both cases. The SC accepted his arguments in both cases. 

Industry experts have opined that these judgments are likely to increase taxes for telcos and multinational corporations (MNCs). 

SC judgment on international treaties gives clarity to investors 

Hailing the SC’s ruling on international tax treaties, the ASG noted that it provides clarity to investors. “The judgment gives a clear picture and idea to investors and investments when they come to India. It gives certainty to foreign investors when they come to invest in the country,” he said. 

On October 19, the SC ruled that parties cannot avail of benefits under the Double Taxation Avoidance Agreement (DTAA) unless Indian tax authorities explicitly notify them. Simply put, the apex court held that even if India enters a DTAA with a nation, one cannot avail of benefits under it unless it is woven into the country’s laws by a notification. Countries enter DTAA to avoid taxation on the same income by two countries. If a person or a company earns income in country A from an investment in country B, the tax will have to be paid only in one country depending on the terms of the DTAA. 

The court ruled this while interpreting the Most Favoured Nation (MFN) clause in the DTAA treaties between India and the Netherlands, France, and Switzerland. The MFN clause provides for lowering the rate of taxation at source on dividends, interest, royalties, or fees for technical services (FTS). As per the MFN clause, when a country gives trade concessions to a member country of the Organisation for Economic Cooperation and Development (OECD), they must be given to all. 

Experts noted that MNCs are required to redo their Return on Investment (RoI) and cost-benefit analysis because of the judgment. 

Venkatraman opined that the judgment is in consonance with global practices as it has considered various conventions for interpreting international tax treaties. He said, “The judgment will only increase and pave the way for larger and stronger investments in India, because the thinking is in line with global practices.” 

The ASG noted that the SC passed the judgment keeping in mind that tax treaties must be interpreted dynamically, keeping pace with changing economic situations. 

Judgment on telco license fee 

On October 16, the SC ruled that the license fee that telcos pay every year as a percentage of their profit should be treated as capital expenditure and not revenue expenditure. 

Noting that the SC interpreted a law that has always been clear on what can be classified as capital expenditure, the ASG said the assessees (telcos) take chances and hope to get these legalised through the interpretation of the law. “It is unfair to blame the government when the courts do not agree with you,” he said. 

The dispute on the classification of licence fees dates back in 2010, when the Income Tax Department filed appeals in the Delhi High Court against the order of the income tax tribunal, which had ruled in favour of the telcos. Subsequently, the case reached the SC in 2014, which gave a judgment on it a decade later.