Principles of Jurisprudence In International Taxation

Shri. Rashmin Sanghavi CA

Principles of Jurisprudence In International Taxation

CA Rashmin Chandulal Sanghvi

The author critically analyzes the judgement of the Supreme Court in CIT vs. P. V. A. L. Kulandagan Chettiar (267 ITR 654) and also uses that judgement as a base to comprehensively explain the fundamental principles of jurisprudence in International Taxation. (The entire article can be downloaded as an E-Book)

Let us refresh our understanding of Double Tax Avoidance Agreement System (DTA) from plain basics to a controversy. There are some basic concepts on which this system of Eliminating Double Tax (EDT) is based. Normally, the phrase “Elimination of Double Tax” is not used too often. Hence there are no popular short forms for the same. I am using this phrase in the current presentation too often. Hence the short form: EDT.

Any conceptual discussion becomes easy & interesting if we take an illustration. So we will take the illustration of the Chettiar’s case decided by the Honourable Supreme Court. The Chettiar HUF, an Indian Resident had incomes from Malaysia. Honourable Court has held that once the income is taxed in Malaysia, Indian Government loses its rights to tax the income again. India has almost always adopted the “Credit System” of Elimination of Double Tax. Honourable Supreme Court has converted it into the “Exemption System”.

The Issue: Is this decision correct!

Does any Court have the power to change a legal system! Especially in the given circumstances!

If we agree on the principles of Jurisprudence stated above, then the decision appears to be correct. Is it correct!

To examine the matter we have to understand the system of Double Tax Avoidance as understood by the tax administrators & practitioners in India & in the rest of the world.

2.2 How does one determine what is the correct interpretation of an agreement & what is incorrect!

There is no way to determine unless we determine the purpose of the agreement or the intention of the parties. For example, is it right to go in the North or South!

Well, both directions are right. However, if you want to go from Mumbai to Delhi, then going north is the right thing to do. If you want to go to Chennai, it is right to go south. Similarly an agreement between two parties has to be interpreted based on the intentions of the parties who executed the agreement, and with reference to the context.

2.3 Consequences:

If the Court decision is contrary to the intentions of the parties to the agreement, what may be the consequences! Are the consequences of the decision fair to both parties! In other words, has justice been done! If not, how serious are the consequences!

If some one says, “The duty of the judge is only to interpret the law; and not to give justice”; is it acceptable! If it is accepted, what are the consequences! Who is responsible to remedy the situation!

2.4 Suggestions:

In case, the consequences are seriously unfair, what is the solution available to the Government/ Parliament! It is a constructive philosophy of serious deliberations that: “If you do not have a constructive suggestion, you have no right to criticise”. I am presenting a proposal. There are bound to be many objections to the suggestion. Can we have a serious dialogue & offer a workable solution to the problems! This article may only be a beginning for a dialogue leading to a resolution.

(Summary of the article completed.)


In the case of CIT vs. P. V. A. L. Kulandagan Chettiar (267 ITR 654) facts were as under. The facts as given by the Honourable Supreme Court (SC) are not very clear.

One has to make some basic assumptions. One can get more facts by referring to the decisions by the Honourable High Court (HC) and the Honourable Income-tax Appellate Tribunal (ITAT) in the same cases. At all appellate levels, batches of cases have been considered simultaneously.

ITAT order states that all the assessees are Hindu Undivided Families (HUFs); and are Indian residents. The cases are referred to by the name of: P.V.A.L. KulandayanChettiar vs. ITO 003 ITD 0426S [1983]

Madras High Court decision in the case is referred to as CIT. vs. S. R. M. Firm. 208 ITR 400. [1914]. Karnataka High Court decision is referred to as CIT vs. R. M. Muthaiah 202 ITR 508 (1993).

As per the facts stated in the Supreme Court decision, the assessee is a partnership firm from India. The assessee had a plantation in Malaysia. It amounted to a Permanent Establishment in Malaysia, owned by an Indian resident. It had several incomes from Malaysia. Under the DTA system, Malaysia would restrict its taxation to the specific percentages prescribed in the Indo-Malaysian treaty. Indian tax department would levy the normal income-tax and give credit for the taxes paid in Malaysia.

However the assessee claimed that since it had paid taxes in Malaysia, it was not liable to pay any tax in India. If it had to pay further taxes in India, where is the elimination of double taxation! The case moved from first appellate authority to second, to the High Court and ultimately to the Supreme Court. The Honourable Supreme Court of India accepted Mr. Chettiar’s claim and “held” that he did not have to pay any taxes in India.

In this case, an Indian resident has income from Malaysia. Hence the Country of Residence (COR) is India; and the Country of Source (COS) is Malaysia.

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