In the year, 1906, Delhi Municipality granted a license to an English company, the ‘Delhi Electric Supply & Traction Co. Ltd' for the purpose of operating an electricity supply undertaking and tramway undertaking. The company carried on business in India till the year 1947 when it sold the undertaking to the government of India. The proceeds were repatriated to England.

On 18 th April 1947, the Indian Income Tax Act, 1922 which was the governing Act at that time, was amended and with effect from 31 st March 1947; a section 12B was introduced, in terms of which, tax became payable by an assessee under the head ‘Capital gains ‘in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after 31st March, 1946.

In terms of this amendment, clearly, there was a liability to capital gains tax for the English Company. But, all the money was already repatriated to England. On 25th May 1949, the company in England went into voluntary liquidation by a special resolution and one Mr. Taylor was appointed as one of the liquidators. In March 1951, the company inserted a notice in the Gazette of India asking the creditors to prove their claims.In the assessment of the company for the year 1948-49, a demand was raised and Commissioner of Income Tax made a claim for the amount of tax before the liquidator.

The liquidator rejected the claim stating that no part of the company's assets could be applied in payment of any claim for taxes by a foreign government.The appeal by the government of India to the High Court of UK and thereafter to the Court of Appeal did not meet with success and ultimately the matter reached the House of Lords.

In deciding the appeal, the House of Lords considered the question as to whether there is a rule of law, which precludes a foreign State from suing in England for taxes due under the law of that State.

While deciding the appeal, the Lords found themselves confronted with a rule that has been followed for years but whose rationale could not be easily found. Lord Viscounts who gave the leading speech expressed shock that such a plea has been raised at all.

“My Lords, I will admit that I was greatly surprised to hear it suggested that the Courts of this country would and should entertain a suit by a foreign State to recover a tax. For at any time since I have had any acquaintance with the law I should have said as Rowlatt, J., said in the King of the Hellenes vs. Brostron (1923) 16 LIL Rep190: "Itis perfectly elementary that a foreign government cannot come here nor will the Courts of other countries allow our Government to go there and sue a person found in that jurisdiction for taxes levied and which he is declared to be liable to in the country to which he belongs.” He then quotes from Tomlin, J. In re Visser : Queen of Holland vs. Drukker (1928) 44 TLR 692 wherein the question was whether to enforce a claim for successions duty by the Queen of Holland against the estate of David Visser, who died domiciled in Holland : “My own opinion is that there is a well recognized rule which has been enforced for at least 200 years or thereabouts, under which these Courts will not collect the taxes of foreign States for the benefit of the sovereigns of those foreign States ; and this is one of those actions which these Courts will not entertain.”

There was thus an authority for the proposition that taxes imposed in one country will not be enforced in another. As for the rationale, the same was attempted by Lord Keith as follows:

“One explanation of the rule thus illustrated may be thought to be that enforcement of a claim for taxes is but an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties.”

He then quoted from American judge, Hand, who in the case of Moore vs. Mitchell had observed: "While the origin of the exception in the case of penal liabilities does not appear in the books, a sound basis for it exists, in my judgment, which includes liabilities for taxes as well. Even in the case of ordinary municipal liabilities, a Court will not recognise those arising in a foreign State, if they run counter to the ‘settled public policy ‘of its own.”There will therefore have to be a scrutiny and “[n]o Court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper."

This then is the rule which is known as the ‘Revenue rule' and ever since this judgement in the case of Government of India vs. Taylor &Anrhas been known as the ‘government of India' principle in the UK.

Changing paradigm :

Then in 2003, OECD introduced the optional article relating to Assistance in Collection of taxes in its model. The recent financial crisis has also changed the attitude of all governments. It is now clear that increased cooperation amongst countries is a must for proper administration of domestic taxes. Therefore, more and more countries are introducing the article on Assistance in Collection of Taxes in their tax treaties.

In the UK, alsosection 173 was introduced in the Finance Act, 2006. Explaining the same, the explanatorynotes stated as follows:

“[Section 173] provides for international agreements about mutual assistance in the enforcement of taxes, covering exchange of information, assistance in tax collectionand the services of documents…[Section 173] implementsMinisters ‘decision to expand the capacity of the United Kingdom to make agreements with other territories about mutual assistance in the enforcement of taxes in order to help tackle international tax evasion and avoidance…”

The government of India principle that held sway for more than two centuries was thus breached in the UK by legislation.

Ben Nevis case :

There was an attempt to press into service the Government of India rule again in a recent case. This involved the UK- South Africa DTAA. UK had a tax convention with South Africa since 1962. The 1962 convention was replaced by 1968 convention which was then replaced by the 2002 convention. Thereafter, subsequent to the enabling provision of Section 173 of the Finance Act, 2006, a new clause 25A was introduced in the 2002 convention by a protocol entered into in 2010. This was in line with the OECD model convention's Article 27 relating to Assistance in Collection of taxes. In terms of this Article, SARS asked for assistance in the collection of taxes in respect of a taxpayer who was in the UK. The facts of the case and the gist of the judgment are as follows:

Ben Nevis is a company incorporated in the British Virgin Islands. Its corporate director is, in turn, incorporated in Guernsey. Its sole registered shareholder is HSBC Trustee (Guernsey) Ltd incorporatedin Guernsey. HSBCT holds the shares as trustee for one Glencoe Investments Trust (GIT), an offshore discretionary trust established in accordance with the laws of Guernsey for a class of beneficiaries that include Mr David King (a UK Citizen but a long-time resident in RSA), his wife and children.

For the tax years 1998, 1999 and 2000, Ben Nevis had a tax liability to the South African Revenue (SARS) for approximately £222 million following the final determination of a tax appeal in October 2010.

SARS alleged that when Mr King learned that SARS was investigating Ben Nevis's tax affairs he procured the transfer of Ben Nevis's assets toone Metlika Trading Limited (MTL), also a company incorporated in the BVI.Its corporate director is incorporated in Guernsey and its sole registered shareholder is HSBCT who holds the shares on trust as trustee of GIT. SARS became aware that as a result of these activities a fund of approximately £7.8 million had been credited to a bank account with a London bank in the name of MTL.

SARS sought help of HMRC under new Article 25A. Accordingly, HMRC obtained restraint orders from the court. Subsequently, Ben Nevis challenged the action of the HMRC in taking action in respect of claims for the period prior to the coming into force of the 2002 DTAA, i.e., before 1.1 2003.

The interesting argument was that the 2002 DTAA, in section 27, which is the article relating to ‘Entry into force', mentioned that the agreement would come into force on the date of receipt of the notifications and shall have effect in South Africa on the 1 st January (1st April in the case of the UK) next following the date in which the convention enters into force. Therefore, Ben Nevis argued that no action could have been taken in respect of claims for the period prior to 1 st January, 2003 and article 25A introduced by the 2010 protocol was limited by the entry into force provision contained in article 27 of the 2002 convention.

An alternative submission was that it was only through the Finance Act, 2006 that the Revenue Rule was amended by the operation of section 173 of the Finance Act, 2006 and hence the Revenue Rule would have applied before the coming into force of the provision and section 173 could not have retrospective operation.

The Court's order is a lengthy one covering various aspects of interpretation and other issues. But, the final outcome of the decision is important in the context of growing cooperation amongst tax administrations both in respect of information exchange as also for collection of taxes. In this connection the Court held:

“In my judgment therefore the true effect of Article 25A when construed in context and in light of its purpose is that once the 2010 Protocol entered into force, Article 25A thereupon applied to all revenue claims as defined subject only to the qualifications referred to within Article 25A itself and subject to the proviso that the request for assistance was made on or after the date when the 2010 Protocol entered into force. Such an approach is consistent with and gives full effect to the purpose of Article 25A – that is mutual bilateral cross frontier tax enforcement - and is consistent with, and gives full effect to, the whole of the 2010 Protocol and in particular Article VI and all the provisions within Article 25A itself. To regard Article 25A as qualified by Article 27 of the 2002 Convention would at least in part defeat the purpose for which Article 25A was agreed between the contracting states because it would exclude at least some revenue claims that would otherwise be included and would do so for no discernible rational or logical reason.

As for the assessee's alternative argument, the court held:

“As I have explained already the Revenue Rule precludes the enforcement in England of taxes assessed by a foreign tax authority. Thus as long as that rule applies, persons in the position of Ben Nevis are entitled to resist any attempt by a foreign tax authority such as SARS to collect tax from it in England. However, an entitlement to resist collection as long as that rule applies does not give rise to an expectation that in relation to such liabilities the law that presently precludes collection in England will never be changed. If the rule is changed then as Mr Richards might have put it, it bites only as to the future enforcement of the existing debt. The fact that the debt was incurred prior to the change in the law is immaterial so long as the taxpayer cannot under the laws of the assessing state prevent its collection. The presumption against retrospectivity would preclude the rearrangement of tax liabilities for prior years of assessment (which is no doubt the, or a, reason why Article 27 is formulated in the terms it was and included in the original of the 2002 Convention) but I see no reason for concluding that it precludes the collection in the future of debts that happen to have fallen due prior to the coming into effect of FA 06. Such a conclusion does not in any relevant sense involve changing “… the character of past transactions carried on upon the faith of the then existing law …” or the retrospective alteration of the legal effect of an act or omission by a later change in the law.”

India has signed a number of agreements for exchange of information. Protocols have also been entered into for this purpose. Questions often arise as to whether information in relation to periods prior to the coming into operation of the agreement should be made available or not. The judgement of the High Court of Justice (chancery division) [2012] EWHC 1807 (Ch) may provide the answer in such cases unless any contrary intention appears from the treaty itself.