Vienna Convention on the Law of Treaties, 1969 (‘VCLT’) defines a ‘treaty’ as an international agreement concluded between countries and provides that such treaty would be binding and that it must be performed in ‘good faith’. According to the Constitution of India, while the Executive leg of the Government has been empowered to enter into a treaty, it is the Legislative leg that has been empowered to frame domestic law for implementation of such a treaty. Furthermore, the Government of India is bound to respect its treaty obligations, even in the absence of a specific legislation implementing it, as long as it does not run contrary to the existing domestic law. However, where there is a conflict between the existing domestic law and a treaty, the Indian judiciary, in the absence of a specific domestic legislation for implementation of the provisions of the treaty, is bound to follow the existing domestic law^[1]. The question, whether a subsequent act of the Legislature which creates an apparent conflict with the existing treaty obligation, is one, that requires deliberation in light of recent amendments to IT Act by way of the Finance Act, 2022.

Over the years, the Government of India has entered into international treaties for technical cooperative assistance, which are aimed at the development of India.  Such treaties, inter alia provide that income of individuals, in connection with services rendered thereunder would be exempt from tax in India. Such exemption was also recognised under Sections 10(8) to 10(9) of the IT Act, thereby, giving a statutory basis to the exemption under such treaties.

However, the Finance Act, 2022, which has amended various provisions of the IT Act, has omitted Sections 10(8) to 10(9) of the IT Act, with effect from April 01, 2022.

Such omission raises doubts whether the exemption contained in treaties as aforestated, continues to apply or whether they stand neutralised owing to amendment of domestic law. It could be argued that such a subsequent omission by the Legislature directly contravenes the existing treaties entered into by the Executive and therefore, violates the good faith principle under international law and the Constitution of India. However, it can be equally argued with force that the law made by the Parliament is supreme and even a subsequent domestic legislation that contradicts existing treaty obligations, should prevail.

The impact of such an omission may result in double taxation of the income of the non-resident individuals, who are tax residents of a country that does not have a double taxation avoidance agreement (‘DTAA’) in terms of Section 90(1)(b) of the IT Act. However, where a DTAA exists and provides for a credit of income tax paid in India, the only impact of this omission would be shifting of taxing rights from the home country of such individual to India. In fact, this seems to be the intent of the Legislature as spelt out in the Memorandum to the Finance Bill, 2022.

Be that as it may, such an intent demonstrates short sightedness in framing tax policies, especially considering that the treaties as aforestated have been entered into by the Executive to boost development of India.

It is worthwhile to note that Section 90(2) of the IT Act, which is a treaty override provision, applies to DTAA or treaties that India enter into for granting of exemption under the IT Act and the corresponding law of the other country, to promote ‘mutual’ economic relations, trade and investment. One may explore, as per the terms of the relevant treaty, whether it falls within one of the clauses of Section 90(1) of the IT Act, in order for it to have an overriding impact vis-a-vis the less beneficial provisions contained in the IT Act.

[1] Gramophone Company of India Limited vs. Birendra Behadur Pandey, (1984) 2 SCC 534 (Supreme Court).