India: Madras HC Upholds Constitutional Validity Of Section 94a (1) And Stricter Income-Tax Rules For The Money Routed Through Cyprus

The High Court of Judicature at Madras, vide its judgment dated 12.04.2016, has upheld the Constitutional validity of section 94A(1) of the Income tax Act, 1961 (hereinafter referred as "the Act") and CBDT Notification 86/2013 specifying 'Cyprus' as the 'Notified Jurisdictional Area' (hereinafter referred as "NJA") for the purpose of the said section.


The petitions were filed under Article 226 of the Constitution of India praying the High Court for the issuance of the following:

i. a Writ of Declaration to declare Section 94A(1) of the Income Tax Act, 1961 (as amended) as ultra vires Articles 14, 19, 51, 253 and 265 read with Entry 82 of List 1 of VII Schedule of The Constitution of India and also being beyond the legislative competence of Parliament under Articles 246 and 248 read with Entry 10, 14, 82 and 97 of List 1 of VII Schedule of The Constitution of India;

ii. a Writ of Declaration to declare Notification No.86 dated 01.11.2013 issued by the 2nd respondent under Section 94A of the Income Tax Act, 1961 (as amended) as ultra vires Section 94A of Income Tax Act read with Articles 14, 19 and 265 of The Constitution of India; and

iii. a Writ of Declaration to declare Press Release titled Concerning_The Double_Tax_Treaty between Cyprus and India dated November 1, 2013 issued by the Ministry of Finance, Government of India as ultra vires Sections 4, 5, 94A(5) and 195 of the Income Tax Act, 1961 read with Articles 14 and 265 of The Constitution of India.


The Section 94-A was introduced in the Income-tax Act, 1961, vide Finance Act, 2011, in respect of transactions with persons located in NJA as an anti tax avoidance measure. As per Section 94-A, the Central Government may, having regard to the lack of effective exchange of information with any country or territory outside India, specify the said country or territory as a notified jurisdictional area in relation to transactions entered into by any assessee.

Accordingly, where any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following rates, namely:

a. at the rate or rates in force;

b. at the rate specified in the relevant provisions of this Act;

c. at the rate of thirty per cent.

India and Cyprus had already entered into an Agreement for avoidance of double taxation of income. However, since Cyprus was not providing the information requested by the Indian tax authorities under the exchange terms of the agreement, CBDT vide Notification No. 86/2013 dated 01.11.2013, specified Cyprus as a notified jurisdictional area under Section 94-A of the Act.

Accordingly, the following implications were issued by the Ministry of Finance in the press release dated 1.11.2013:

i. If an assessee enters into a transaction with a person in Cyprus, then all the parties to the transaction shall be treated as associated enterprises and the transaction shall be treated as an international transaction resulting in application of transfer-pricing regulations including maintenance of documentations [Section 94- A(2)];

ii. No deduction in respect of any payment made to any financial institution in Cyrus shall be allowed unless the assessee furnishes an authorization allowing for seeking relevant information from the said financial institution [Section 94-A(3)(a) read with Rule 21AC and Form 10FC];

iii. No deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus shall be allowed unless the assessee maintains and furnishes the prescribed information [Section 94-A(3)(b) read with Rule 21AC];

iv. If any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the assessee [Section 94-A(4)];

v. Any payment made to a person located in Cyprus shall be liable for withholding tax at 30 per cent or a rate prescribed in Act, whichever is higher [Section 94-A(5)].


A tripartite Agreement dated 16.10.2014 was entered into by and between the following parties:

a. an Indian company by name New Kovai Real Estate Private Limited;

b. a company incorporated in the country of and under the laws of Cyprus by name Skyngelor Limited and

c.the three petitioners of the case.

By the said Agreement, the Cyprus company, which was holding about 15,200 equity shares of the face value of INR 10 each and about 21,39,200 compulsorily convertible debentures of the face value of INR 100 in Kovai Real Estate Private Limited, agreed and undertook to sell all those shares and debentures to the writ petitioners of the case. Payment of the purchase consideration was agreed to be done in 4 tranches.

After three months of the execution of the aforesaid Securities Purchase Agreement, proceedings were initiated in terms of section 94-A (1) and the Notification No.86/2013 and the petitioners were called upon to show cause as to why each one of them should not be treated as an assessee in default for non deduction of tax at source, warranting the initiation of proceedings under Section 201(1)/201(1A) of the Act.

Accordingly, the petitioners challenged the Constitutionality of Section 94-A (1), the Notification dated 1.11.2013 and the Press Release dated 1.11.2013.


1.Constitutionality of Section 94-A (1)

The contention of the petitioners is that once India has entered into a Treaty with another country and such Treaty has also been notified under Section 90 of the Income Tax Act, 1961, the Treaty becomes a law under Article 253. Therefore, the Parliament is not competent to enact any law by invoking Article 245(1), as the power under Article 245(1) is subordinate to the power under Article 253 and accordingly, Section 94-A(1), in as much as it confers a power upon the Central Government to specify by notification, any country as a notified jurisdictional area, without reference to the existence of a Treaty with that country, is violative of Articles 14, 19(1)(g), 51, 245, 253 and 269 of the Constitution.

As a complete answer, to the challenge of the petitioner on the power of the Parliament, to enact Section 94A, despite the existence of an agreement entered into under Section 90 (1) of the Act, a paragraph was cited from the judgment of Supreme Court given in the case of Ram Jethmalani Vs. Union of India [2011 (8) SCC 1]:

"The Government cannot bind India in a manner that derogates from the Constitutional provisions, values and imperatives."

Accordingly, the High Court held that Section 90(1)(c) cannot be diluted by Section 94A(1) overlooking the fundamental fact that if the purpose of the Central Government entering into an agreement under Section 90(1) is defeated by the lack of effective exchange of information, then Section 90(1)(c) [i.e. exchange of information for preventing the evasion of tax] is actually diluted by one of the contracting parties and not by Section 94A(1).

2. Vires of the Notification dated 1.11.2013 :

It was brought to the notice by the High Court that the Section 94-A(1) uses the phrase "any country or territory". We cannot read the said phrase to mean "any country or territory other than those covered by Section 90(1)." Therefore, any Notification by the Central Government, issued under Section 94A (1), is also in exercise of delegated power under the said section.

Also, the provisions of DTAA entered into by India with Cyprus on 21.12.1994, contains an obligation for the exchange of information. According to the Union of India, they had been making a number of requests to Cyprus, before issuing the Notifications, for providing relevant information such as details of the beneficial ownership of the persons making huge investments in India and the source of such funding. But the government of Cyprus failed to do so. Accordingly, the notification issued was not ultra vires under the section 94A (1).

3. Vires of the Press Release dated 1.11.2013

The challenge of the petitioners to the Press Release is that it mentions "any payment" made to a person located in Cyprus, to be liable for withholding of tax at 30% in terms of Section 94-A(5). According to the petitioners, Section 94-A(5) uses the expressions "any sum", "income" and "amount" and that each of these expressions (1) sum, (2) income, (3) amount and (4) payment, has different connotations under the Act and that instead of borrowing the very same language used in Section 94-A(5), the Press Release has used the expression "any payment". Therefore, it is his contention that the Press Release runs contrary to the statutory prescription and hence liable to be set aside.

The High Court held the following:

i. Sub-Section (5) of Section 94-A is worded from the point of view of the recipient of any sum, income or amount whereas the Press Release is worded from the point of view of the person making the payment.

ii. The Press Release is not a legal document, but a note intended for the benefit of the common man. Therefore, the words and expressions used therein cannot be tested on the strength of Law Lexicons.

Therefore, the question of assailing the Press Release does not arise.


Therefore, as per the High Court of Madras, the challenges to Section 94-A (1), the Notification dated 1.11.2013 and the Press Release dated 1.11.2013 vide the writ petitions were not held to be sustainable in law.

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