ITAT: No scope for unilateral changes in taxation treaties

In a breather to multi-national companies working out of India, the Mumbai Income Tax Appellate Tribunal (ITAT) has held that retrospectively amending the definition of 'royalty' in the Income Tax Act, 1961 cannot automatically alter the provisions of Double Taxation Avoidance Agreements.

The tribunal's ruling, which comes in the case of WNS North America versus the Income Tax Department, would provide significant relief especially to IT and ITeS companies covered under such tax pacts. Many such firms have been reeling under a retrospective provision included in Budget 2012-13 that retrospectively widened the definition of 'royalty' from June 1, 1976.

Consequently, payments towards use of computer software, information, databases, transponder, uplinking facilities, leased lines have all become royalty and taxed accordingly.

While the tax department has said the changes were made to resolve conflicting decisions by various courts, it has irked software firms that will now face a massive rise in their tax burden.

But referring to the India- US tax avoidance pact that covers WNS North America, the tribunal has now held, "A country who is party to a treaty cannot unilaterally alter its provisions. If there is no amendment to the provision of the treaty but there is some amendments adverse to the assessee in the Act, which provisions has been specifically defined in the treaty or there is no reference in the treaty... the amendment... shall have no unfavourable effect on the computation of total income of the assessee."

It has also stressed that any amendment to treaty can be made bilaterally by means of deliberations between the two countries who signed it. Alternatively, the domestic law will come into play only on reference by the treaty.

"The ruling has re-iterated that retrospective amendments in the domestic tax law do not impact the provisions in the tax treaty, unless either the treaty has also been amended on the same lines as the domestic law, or the particular provision in the tax treaty refers back to the domestic law," said Sandeep Chaufla, executive director, PwC, adding that it also fortifies the taxability of reimbursements towards expenses incurred on behalf of the payer.

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