Sunday, March 06, 2011


By K P C Rao.,
Practising Company Secretary

In the interpretation of the provisions of a taxing statute, the Indian Courts have repeatedly taken a view that a taxing statute must be interpreted strictly, without too much leeway for what might be argued to be the more just or equitable interpretation. There has traditionally been hesitance in interfering with what has been viewed as the arena of fiscal policy, something left to the Government.[1]

It is apparent, therefore, that the emphasis has been on internal aids to interpretation as far as taxing statutes are concerned, with arguments regarding the purpose, social context and source of legislation taking a backseat in comparison to the plain reading of a statute.

It is, however, of significance that one of the central rules in the interpretation of taxing statutes, the rule of strict interpretation, finds its origins in the decisions of foreign courts. Our Courts have time and again relied upon English case law in ruling that a taxing statute must be interpreted strictly, and that the words of a statute to be given their natural meaning[2]. That internal interpretational tools are to be relied upon is a principle derived from the external interpretational tool; foreign judgments.

 Meaning and scope of foreign judgment

Foreign judgment’ means a judgment of a foreign court.  In other words, a foreign judgment means an adjudication by a foreign court upon a matter before it. Thus judgments delivered by courts in England, France, Germany, USA etc are foreign judgments. Foreign court is defined as a court situate outside India and not established or continued by the authority of the Central Government.

Section 13 of the Civil Procedure Code 1908 embodies the principle of res judicata in foreign judgments.  This provision embodies the principle of private international law that a judgment delivered by a foreign court of competent jurisdiction can be enforced in India.  The section is not confined in its application to plaintiffs. A defendant is equally entitled to non-suit the plaintiff on the basis of a foreign judgment.[3]

Binding nature of foreign judgments

The Code of Civil Procedure provides that a foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim litigating under the same title except

a)     Where it has not been pronounced by a court of competent jurisdiction.
b)     Where it has not been given on the merits of the case;
c)     Where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which such law is applicable;
d)     Where the proceedings in which the judgment was obtained are opposed to natural justice;
e)     Where it has been obtained by fraud;
f)      Where it sustains a claim founded on a breach of any law in force in India.

Foreign judgments when not binding

Under Section 13 of the Code, a foreign judgment is conclusive and will operate as res judicata between the parties thereto except in the cases mentioned therein. In other words, a foreign judgment is not conclusive as to any matter directly adjudicated upon, if one of the conditions specified in clauses (a) to (f) of Section 13 is satisfied and it will then be open to a collateral attack[4].  Dicey[5] rightly states:

“A foreign judgment is conclusive as to any matter thereby adjudicated upon and cannot be impeached for any error either 1) of fact; or 2) of law.”

Presumption as to foreign judgments

Section 14 of the Code declares that the court shall presume, upon the production of any document purporting to be a certified copy of a foreign judgment, that such judgment was pronounced by a court of competent jurisdiction, unless the contrary appears on the record, or is proved. However, if for admissibility of such copy any further condition is required to be fulfilled, it can be admitted in evidence only if that condition is satisfied.

The case of Income-tax Officer, Tuticorin vs. T.S. Devinath Nadar and Ors[6], (“Devinath Nadar case”) deserves mention in this regard, for having referred to both English case law and English treatise on taxing statutes in support of the application of the rule of strict interpretation. The Court also noted at paragraphs 35 and 37, that taxing statutes are to be interpreted in favour of the assessee. Referring to the Halsbury’s Laws of England and to the case of Cape Brandy Syndicate vs. Inland Revenue Commissioners[7] the Supreme Court has held as follows:

These principles have been accepted as correct both by the English Courts and the superior courts in this country. It is now well settled that if the interpretation of a fiscal enactment is in doubt, the construction most beneficial to the subject should be adopted even if it results in obtaining an advantage to the subject; the subject cannot be taxed unless he comes within  the letter of the law and the argument that he falls within the spirit of the law cannot avail the department.”

The practice of referring to English case law to determine the principles applicable to the interpretation of taxing statutes is very much prevalent even today, in spite of there being Indian precedents in these areas. The necessity for the study of foreign trends has far from diminished, given especially the economic liberalization of India. In this context, the case of Union of India (UOI) and Anr. vs. Azadi Bachao Andolan and Anr[8] (“Azadi Bachao case”), a decision of the Supreme Court regarding the validity of the use of a low tax country for the routing of foreign investments into India which relied quite significantly on foreign case law and foreign principles to validate its stand on the issue, merits discussion in some detail.

In this case, another significant rule of the interpretation of tax statutes has been revisited; that an assessee is entitled to arrange his affairs so as to minimize his liability to tax, as long as the assessee remains within the four corners of the law. The rule of giving effect to the form of taxing legislation rather than the substance of the same is one that has been the subject of debate in the interpretation of tax statutes.

The Azadi Bachao case, in the above context, referred to the case of McDowell and Company Ltd. vs. Commercial Tax Officer[9] (“McDowell case”), where the distinction between tax evasion and tax avoidance had been somewhat obscured. The McDowell case had referred to the English cases of IRC vs. Fisher’s Executors[10] and IRC vs. Duke of Westminster[11], cases that had upheld the right of the assessee to arrange his affairs so as to minimize tax, and found that the principle had undergone change post the Second World War.  In support of this they had referred to certain later English cases; Lord de Walden vs. IRC[12], Lord Simon in Latilla vs. IRC[13], Campbell vs. IRC[14], Greenway vs. IRC[15]  and .T. Ramsay Ltd. vs. IRC[16] being some of them. The McDowell case had held that where the sole purpose of certain transactions was to avoid tax, the same would be ignored for the purposes of the determination of tax liability.

The Azadi Bachao case, however, disagreed with the conclusion in the McDowell case by citing Craven vs. White[17], and MacNiven (Inspector of Taxes) vs. West Moorland Investments Ltd.[18] as later English decisions which reiterated the principle enshrined in the West Minister and Fisher’s cases.

In the Azadi Bachao case, we see a detailed study of the position of foreign judgments on an interpretational issue, which shows that Indian law derives much from internationally accepted principles.

What is significant about the Azadi Bachao case is that apart from English case law, which has regularly found mention in Indian judgments due to the fact that Indian law has derived its colour and substance from English law, it discusses American, Australian and Canadian  case in some detail. Irrespective of whether the principles in the cases referred to have been followed , the reference to these cases is of significance in as much as  it indicates  that the Supreme Court has gone further than simply English Law, to study trends  in other parts of the world. The Supreme Court, in this case, has referred also to Internationally accepted authorities on tax treaty interpretation, the OECD commentaries. The decision in the Azadi Bachao case is one that has taken into account the treatment of tax avoidance measures in different economies of the world, a matter of significance in the present time.

The other significant case that deserves mention in the context of the relevance of foreign judgments is that of Commissioner of Income Tax, A. P.1. Vs. Visakhapatnam Port Trust.[19] (“Port Trust case”) The judgment in this case refers to commentaries and articles on the O.E.C.D. Model Convention, and German and Swiss judicial decisions regarding the interpretation of the terms of a tax treaty. The Court also looked at British publications and Canadian and American Government tax publications with regard to the issues before them.

The significance of this judgment is that it is a recognition of the importance of uniformity in the interpretation of certain tax legislation for the purpose of giving effect to the same, especially with regard to issues arising from cross border trade. Also, given that India is not party to the OECD[20], it is significant that the court looked to commentaries on the OECD model as an external tool of interpretation. Also notable is the fact that the judgment has referred to civil law as an interpretational tool, a reference not seen in Indian judgments as often as references to common law.

In Narasimha Rao v Venkata Lakshmi[21] , the Supreme Court held that mere production of a Photostat copy of a decree of a foreign court is not sufficient. It is required to be certified by a representative of the Central Government in America.

Conclusiveness of foreign judgment

A foreign judgment is conclusive and will operate as res judicata between the parties and privies though not strangers.  It is firmly established that a foreign judgment can be examined from the point of view of competence but not of errors. In considering whether a judgment of a foreign court is conclusive, the courts in India will not require whether conclusions recorded by a foreign court are correct or findings otherwise tenable. In other words, the court cannot go into the merits of the original claim and it shall be conclusive as to any matter thereby directly adjudicated upon between the same parties subject to the exceptions enumerated in clauses (a) to (f) of Section 13.[22]

Enforcement of foreign judgments

A foreign judgment which is conclusive under Section 13 of the Code can be enforced in India in the following ways.

1)        By instituting a suit on such foreign judgment, or
2)        By instituting execution proceedings


The importance of foreign judgments and other foreign commentaries on taxation have found reference in Indian judgments, and are significant influencers of the way Indian tax law is interpreted, although in different fields, and for different reasons.

Today, in light of the phenomenon of the global village, and of the volume of cross border trade increasing by leaps and bounds, the importance of international trends is ever increasing. Even where domestic law is concerned, after liberalisation, perhaps policy in other countries has more to offer India than earlier suspected. The receptiveness of the Indian judiciary to relevant references to international sources can therefore only be a positive trait, in the context of law in general and tax law in particular.


                         [ Published in Corporate Secretary of ICSI, January, 2011]

[1] Zodiac Advertisers vs. Union of India, [2004] 265 ITR 262 (Ker),
[2] St. Aubyn (LM) vs. A.G., (1951) 2 All ER 473.   
[3] Badat Vs East India trading Co., AIR 1964 SC 538
[4] Satya v Teja Singh (1975) 1 SCC 120; AIR 1975 SC 105 (1975) 2 SCR  197
[5] Conflict of Laws, 7th edn.,cited in viswanathan Vs Abdul Wajid, AIR 1963 SC 1(58)
[6] Income-tax Officer, Tuticorin vs. T.S. Devinath Nadar and Ors AIR 1968 SC 623
[7]Cape Brandy Syndicate vs. Inland Revenue Commissioners [1921] 1 K.B. 64.
[8]Union of India (UOI) and Anr. vs. Azadi Bachao Andolan and Anr [2003] 263 ITR 707 (SC)
[9] McDowell and Company Ltd. vs. C T O; [1985] 154 ITR 148
[10] IRC vs. Fisher’s Executors; [1926] AC 395
[11] IRC vs. Duke of Westminster; [1936] AC I; 19 TC 490
[12] Lord de Walden vs. IRC; [1942] 1 KB 389; 25 TC 131
[13] Latilla vs. IRC [1943] AC 377; 25 TC 107
[14] Campbell vs. IRC [1967] Ch 651
[15] Greenway vs. IRC [1971] 3 All ER 136; 3 WLR 386
[16] T. Ramsay Ltd. vs. IRC [1982] AC 300; [1981] 2 WLR 449 (HL)
[17] Craven vs. White (1988) 3 All ER 495
[18] MacNiven (Inspector of Taxes) vs. Ltd (2001) 1 All ER 865
[19] Commissioner of Income Tax, A. P. I. vs. Visakhapatnam Port Trust 144 ITR 146(AP)
[20] Organisation for Economic Co-operation and Development, France. (An organisation dedicated to global development, consisting of 34 member countries span the globe, from North and South America to Europe and the Asia-Pacific region.)
[21] Narasimha Rao v Venkata Lakshmi (1991)3 SCC 451 (463-64) ; 1991 SCC (cri) 626.
[22] Viswanathan v Abdul Wajid AIR 1963 SC 1

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