On a cold January day, January 24, 2006, to be precise, the German Foreign Intelligence Agency, Bundesnachrichtendienst (BND) received an anonymous e-mail. The sender claimed to have secret data about wealthy Germans having secret accounts in LGT Bank of Liechtenstein. The German Press subsequently outed this person as one Heinrich Kieber, code named Henry who used to work for the LGT Bank of Liechstenstein. His work there involved digitization of all paper documents at a subsidiary LGT,Treuhand and he had access to contracts, minutes of meetings, handwritten notes – a treasure trove of information.

To cut a long story short, this Henry of ours, having been rebuffed by the UK tax authorities, whom he had approached earlier with his secret data, approached BND and, after protracted negotiations and verification of the authenticity of the data by the German tax administration, finally made over four DVDs containing the secret data in lieu of 5 million euros and a new identity. The DVDs contained information about 4527 Liechtenstein Foundations and institutions of which German taxpayers owned only 1400. According to Der Spiegel, more than half of the investors in the list and about 3100 foundations were non-Germans. In February 2008, the German Government offered to share the data with foreign governments free of cost.

This became a political issue in India with the opposition charging the government of inaction. Much later, a news report appeared in the Indian Express on 31/3/2009 that Indian authorities had indeed put in a request to the German Government in February 2008 itself and that unknown to the Indian authorities; a German lawyer was trying to block the transfer of the information to the Indian authorities. The information was subsequently made available under the exchange of information provision of the DTAA between India and Germany. Apparently, the list contained 23 names, out of which 18 related to Indian residents and assessments were framed against them based on such information. Thus began the India chapter of the story of LGT Bank which culminates in the stunning indictment of the Government of India by the Supreme Court in the case of Ram Jethmalani Vs UOI (2011-TII-05-SC-INTL).

The Supreme Court order recounts, that it was in 2009, that some eminent citizens led by Mr. Ram Jethmalani filed a writ petition under Article 32 of the Constitution of India alleging inaction on the part of the Government of India in seriously pursuing cases of black money generation, money laundering etc. which jeopardize the security of the nation and asking for a court monitored investigation since the fundamental right of the citizen to good governance has supposedly been violated by the acts of omission and commission of the Government of India. The order of the Supreme Court delivered on July 4, 2011 can be divided into three parts for the purpose of our analysis.

In the first part of the order, when the court berates the government for following neo liberal policies, one finds that the court has very well articulated what many have been thinking of such policies where all kinds of corrupt practices and nepotism are glossed over in the name of liberalization and foreign investment. However, as Swaminathan Aiyar points out the Government's policies may not be neo-liberal but are in fact ‘neo-illiberal' enabling exploitation of loopholes. May be. The point is that successive governments have, in the name of market friendliness and foreign direct investment, tweaked policies and any criticism is brushed aside for trying to bring back the ‘chochalist' policies of the past with its licence and permit raj et al. However, as the Radia tapes have so eloquently demonstrated, what we have in India is not capitalism but crony capitalism. The Supreme Court judgement brings this aspect again to the fore. Unfortunately however, all these erudite discussions are not relevant because they do not lay down any ratio at all.

The second part of the court's observations are relevant in that the court, taking the example of investigations by the Enforcement Directorate in the now famous Hasan Ali Khan and Kashinath Tapuria case, lambasts the government for its inaction and orders the constitution of a Special Investigation Team (SIT), headed by a retired judge of the Supreme Court. Although it seems from the judgement that the government had no objection to the monitoring by the court, the government in its review petition challenges that any such concession has been made. The order of the court and powers of the proposed SIT also seem to be much too comprehensive but that is not the focus of this article.

It is in the third part of the order that the court discusses the issue of disclosure of names of persons having account in the LGT bank, which was handed over to the Government of India by the Government of Germany. Contrary to what most of the other commentators have said about judicial overreach and violation of the doctrine of separation of powers, it is this part of the order that needs to be seriously discussed and debated since it is likely to have adverse consequences for our ability to gather information from outside.

The petitioners alleged that the Government of India, inspite of receiving information about the presence of a large number of Indian citizens in the LGT Bank list, did precious little to secure the information about them and proceed against them. It was alleged that such names include the identities of prominent and powerful names holding unaccounted monies in bank accounts abroad although the names that are doing rounds are not all that jaw-dropping. Before the Supreme Court, the petitioners contended that the government refused to divulge the names even though the same was asked for under the Right to Information Act, 2005 and insinuated that the reluctance of the government to reveal the names was because this would lead to the discovery of powerful persons engaged in various unlawful activities both in generation of unlawful and unaccounted monies and their stashing away in banks abroad.

Government of India argued that having obtained the names pursuant to the Article relating to exchange of information of the DTAA between India and Germany; it was prohibited from disclosing the same to the petitioners. It is in this context that the Supreme Court examined as to whether Article 26 of the DTAA with Germany proscribes disclosure of such names in the context of the proceeding before the Supreme Court. For this purpose, the Court examined Article 26 of the India-Germany DTAA, a copy of which, the court says in para 57 of the order, was submitted by the Union of India.

From a reading of the Article, the Supreme Court concluded that contrary to the assertions of the Union of India, there is no absolute bar of secrecy; that instead the agreement specifically provides that the information may be disclosed in public court proceedings. Besides other observations, the Supreme Court in para.62 of the order, held as follows:

“62. The last sentence of Article 26(1) of the double taxation agreement with Germany, "[T]hey may disclose this information in public court proceedings or in judicial decisions," is revelatory in this regard. It stands out as an additional aspect or provision, and an exception, to the preceding portion of the said article. It is located after the specification that information shared between contracting parties may be revealed only to "persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to taxes covered by this Agreement." Consequently, it has to be understood that the phrase "public court proceedings" specified in the last sentence in Article 26(1) of the double taxation agreement with Germany refers to court proceedings other than those in connection with tax assessment, enforcement, prosecution etc., with respect to tax matters. If it were otherwise, as argued by Union of India, then there would have been no need to have that last sentence in Article 26(1) of the double taxation agreement at all. The last sentence would become redundant if the interpretation pressed by Union of India is accepted. Thus, notwithstanding the alleged convention of interpreting the last sentence only as referring to proceedings in tax matters, the rubric of common law jurisprudence, and fealty to its principles, leads us inexorably to the conclusion that the language in this specific treaty, and under these circumstances cannot be interpreted in the manner sought by Union of India." (Emphasis supplied).

This observation of the Supreme Court in relation to the interpretation put on Article 26(1) is not in consonance with the generally accepted interpretation of the provision. Klaus Vogel in his treatise on Double tax convention mentions as follows:

“… The use to which information may be put is also restricted to taxes covered by the DTC. Any information given for income tax purpose may be used for capital tax as well, but it would, for instance, not be capable of being used for the purpose of imposing inheritance tax. Strict compliance with this restriction is one of the main pillars of the exchange of information system. Apart from that, the fifth sentence of Art.26 (1) envisages the possibility for persons authorized to use the information to disclose it in public court proceedings or in judicial decisions. This refers exclusively to court proceedings within the meaning of the third and fourth sentences of Art.26 (1), i.e., cases dealt with by fiscal courts or in penal proceedings for fraud or other tax offences. Once information has been disclosed, it should be regarded as common knowledge and ceases to be subject to the restriction on the uses to which it may be put under the third and fourth sentences of Art.26 (1) MC. However, the MC does not allow any disclosure outside court proceedings or for reasons other than those named in Art.26. To the extent that domestic rules on secrecy in tax matters envisage such possibilities for disclosure, they are not applicable to information received under the international exchange of information system…” (Emphasis supplied)

The provision relating to secrecy of information received is now dealt with in the OECD Model Convention in a separate Paragraph 2 although the language is the same the only difference being that disclosures to oversight bodies like the CAG is now contained in the article itself. In Paragraph 12 of the OECD commentary on paragraph 2 of Article 26, it is mentioned “… The information received by a Contracting State may be used by such persons or authorities only for the purposes mentioned in paragraph 2. Furthermore, information covered by paragraph 1, whether taxpayer-specific or not, should not be disclosed to persons or authorities not mentioned in paragraph 2, regardless of domestic information disclosure laws such as freedom of information or other legislation that allows greater access to governmental documents.” (Emphasis supplied).

In the face of such categorical prohibition in the commentary as also in the work of Klaus Vogel, one needs to examine again the order of the Court to see as to whether the Supreme Court has rightly referred to the Article and it transpires that there are a few important differences.

It is also seen that the Supreme Court has based its decision without taking into account the protocol. It is possible that the protocol was not brought to the notice of the Court. Unlike most of the other treaties, the India- Germany treaty indeed contains a peculiar stipulation in the protocol as follows:

Protocol:

“7(b)

(i)… (ii)….

(iii) The Contracting States shall be obliged to take effective measures to protect the personal data communicated against unauthorised access, unauthorised alteration and unauthorised disclosure; …..”

The Supreme Court has quoted the relevant portion of Article 26 and it has been stated that this was as per a copy as supplied by the Government of India. However, in the quote given by the Supreme Court, ( see table above) the sentence underlined is missing. It is not clear whether this was deliberately not included as being unnecessary or whether the line was missing in the copy given by the Government of India. It is also not evident if the interpretation given by the Court would have been different even if the line were there or if the court had taken into account the protocol as mentioned earlier. But, having noted the difference, let us now analyse the provision of Article 26(1).

The first point to be noted is that under the extant treaty, the obligation of Germany (or India for that matter) is restricted to exchanging information that is necessary for carrying out the DTAA. Nevertheless, Germany shared the information that it had purchased with the Government of India and we should be grateful for that. What is not specifically stated in any DTAA and what does not seem to have been explained to the court is that there are three types of exchange of information - on request, spontaneous and automatic. Information can be shared on request which is most often the case involving India and which is what most of us would believe the Exchange of Information article is all about. But, there are two other types of exchange of information- spontaneous and automatic. Automatic exchange of information is what is resorted to by OECD member countries and is done automatically in a specified format. Mostly these relate to information about interest, dividends etc. paid to the residents of the partner country. In the past, we have received such information from some OECD countries. The most effective exchange of information though is the spontaneous exchange of information. Here the competent authorities exchange such information that they consider could be of use to the other contracting state. Germany has in the past, spontaneously exchanged information with us, which has been found useful. In the present case also, Germany volunteered to share the information relating to the LGT bank account holders because it thought that the same would be of use to the Indian Revenue. From the arguments on behalf of the government, it appears that the information could have been supplied under the spontaneous exchange route. One is not privy to what conditions Germany has imposed on the information supplied by it. Information that is supplied even spontaneously is nevertheless under Article 26 and the conditions of confidentiality as contained in that article govern such information as well. Generally, information supplied contains a stamp to the effect that: “The information supplied above is governed by the provisions of Article 26 and its use is governed accordingly.” In the present case, we do not know whether there was any such stamping by the German authorities but it is very much unlikely that it will not.

The second point to note is that the information supplied by a partner country can be disclosed to courts and administrative bodies. However, the expression is within parenthesis meaning that such courts and administrative bodies should also be engaged in assessment, collection or recovery of taxes. Prior to the coming into force of the OECD 1978 model, courts or administrative bodies were not included as authorities to whom the information could be disclosed. These bodies were included in the subsequent models only because they are also involved in administration of taxes.

It is also permitted under the Article to disclose the information in public court proceedings. From this, the Supreme Court deduced that the information obtained should have been disclosed to the petitioners to help them prosecute their case against the government. In this regard, the Supreme Court said that there is nothing in the article, which prevents such disclosure. The court overruled the argument of the government to the effect that the proceedings as referred to in Art 26(1) should be in relation to tax matters. The logic given by the court isthat the expression "They may disclose this information in public court proceedings or in judicial decisions," is revelatory in this regard; that it stands out as an additional aspect or provision, and an exception, to the preceding portion of the said article and since it is located after the specification that information shared between contracting parties may be revealed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection etc. of, the taxes covered by the Agreement and therefore the phrase "public court proceedings" specified in the last sentence in the Article refers to court proceedings other than those in connection with tax assessment, enforcement, prosecution etc., with respect to tax matters and that otherwise, the last sentence would become redundant.

With due respect, this line of reasoning is flawed, perhaps because the Supreme Court did not take into account the omitted line of Article 26(1). (See table above). The Supreme Court seems to agree that the information obtained from a treaty partner country can only be disclosed to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes as mentioned in the first line of Art.26 (1). However, once the information is received, it is only then there is question of utilizing the same in court proceedings and in framing of orders against a particular taxpayer. That's why the next line says that such persons shall use the information only for such purpose. The use of the expression such persons or authorities obviously mean only those persons or authorities mentioned earlier i.e., those involved with the administration etc. of taxes. It cannot include any more types of authorities or courts. When the next line then says, ‘They may disclose the information in public court proceedings or in judicial proceedings', it is obvious that ‘they' can refer only to those authorities or courts mentioned in the first line that are involved in administration of taxes.

Here the Hon'ble Court went wrong perhaps because of the fact that it failed to read one more line and perhaps because these issues were not raised before it. It is wrong to think that merely because a court is allowed to receive confidential information (as recognized by the first sentence) that it would automatically have the right to disclose it during proceedings or in a decision. That is the reason why the last line is necessary so that in a given case, the tax authorities or the tax courts could utilize the information received from another country in a case that would concern the relevant taxpayer. It seems that the logical sequence of the sentence in Art.26 (1) that information is first received and then utilized was not properly explained to the Court and to that extent the decision seems to be laying down a difficult precedence.

Government of India in its application filed under Article 142 of the Constitution read with Rule 6 of the Supreme Court of India Rules against the aforesaid order of the Court points out that it was ready nevertheless to produce the information received before the Court in a sealed envelop with a request that it may not be made public. This is the procedure followed in the case of sensitive domestic information as well. For example, the satisfaction notes in the search cases have often been produced before the Court in sealed cover for the court to ascertain if the satisfaction of the authority concerned was based on adequate facts. Therefore when article 26 specifically says that information received should be considered as secret in the same manner as information received under domestic law; there is no reason why the same procedure could not be accepted. The obligation to disclose information, if any is to the court, a tax court and not to the petitioners who are private individuals.

Almost all important countries have domestic law provision to ensure confidentiality of information relating to the taxpayer and his affairs. If information relating to a taxpayer has to be shared, it has to be first ensured that such information remains confidential in the receiving State. It is because of the fact that confidentiality of information is preserved by the Exchange of Information Article that supply of information cannot be denied on the ground that it would contravene the domestic tax secrecy rules. Therefore, if the confidentiality clause is violated, countries will be reluctant to share information. When all industrialised countries are moving towards greater transparency and co-operation, it is unfortunate that the Hon'ble Supreme Court should take the stand that it has taken. Exchange of Information is perhaps the only good reason to enter into a tax treaty or Information Exchange Agreement, but by taking the stand that such information can even be divulged to private persons, we will be killing the only goose that lays golden eggs.