Tax Planning On Sale of House Property.

“Penny  Saved is the  Penny earned”.

Whenever a person sells any property, he has to pay income tax on the gain he earned.  This gain is the difference between the sale price of the property and the purchase price of the property.

As we see the property rates have multiplied in recent years, this will result in big amount of capital gain and the person will have to pay income tax on this capital gain.

Here, we are discussing few tax provisions which may be helpful to understand the taxability on sale of property and its planning for taxes.

  If the property kept for more than 36 months and than sold then  profit earned would be termed as long term capital gain.

  If the property sold within  36 months from the date of purchase than it would be termed as short term capital gain.

  Tax liability In the short term capital gain would be as per normal income tax rates under income tax Act.

  Tax liability in long term capital gain would be at the rate of 20%.

However this can be reduced through various means such as :   

Benefit of cost inflation index (CII).

-          Investment in to other residential property.

Mode of computation of Capital Gain :

       The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :

(i) Expenditure incurred wholly and exclusively in connection with such transfer;

(ii) The cost of acquisition of the asset and the cost of any improvement thereto :

 For example:

House purchased in year 2008-09 for Rs. 15 Lacs

Sold during year 2009-10 for Rs. 20 Lacs

Then Capital gain (Short term capital gain) is Rs. 5 Lacs ( 20 – 15 Lacs)

However, in case of long term capital gain, a person can get the benefit of indexation.

(iii)Indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;

Example with Cost Inflation Index on long term capital gain :

For example, if a property purchased in 1991-92 for Rs 10 lakh  (CII of year 199)

Being sold during 2010-11 for Rs 40 lakh, (CII of year 711)

indexed cost = (711/199) x 10 = Rs 35.72 lakh.

And the long-term capital gains would be Rs 4.27, that is Rs 40 lakh minus Rs 35.72 lakh.

(iv) “Indexed cost of any improvement” means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;

For example, if a property purchased in 1991-92 for Rs 10 lakh  (CII of year 199)

Person expended Rs. 5 lacs on improvement of property during 1997-98  (CII of year 331)

Property was sold during 2010-11 for Rs 50 lakh,  (CII of year 711)

Now, indexed cost = (711/199) x 10 = Rs 35.72 lakh. 

Further indexed cost of improvement = (711/331) x 5 = Rs 10.74 lakh 

Total inflated cost  = 35.72 + 10.74 = 46.46 Lacs            

And the long-term capital gains would be Rs 3.54, that is Rs 50 lakh minus Rs 46.46 lakh.

(v) “Cost Inflation Index” for any year means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for that year, by notification in the Official Gazette, specify 759 in this behalf.  This concept is introduced to provide benefit of inflation to the assessee.

Individual or a Hindu undivided family have following exemption from long term capital gain under section 54 of Income Tax act :

      If the long Term capital gain invested  within a period of one year before or two years after the date on which the transfer took place purchased another residential house property

      Or ,  within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following way :

-  If the amount of the capital gain is greater than the cost of the residential house so purchased or constructed the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year;

-  If the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45.

- Till the time the amount of Long Term Capital gain is not utilized for the same, it should be deposited under the scheme of Long term Capital gain.

Thus by knowing these provisions an assessee can save Capital Gains Tax substantially.

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How to read an agreement.

1. Introduction

From time immemorial, the commercial world has worked on contracts and agreements. The only difference between then and now, is that earlier a lot of these agreements were oral in nature, whereas nowadays, most businesses, if not all, prefer a binding written agreement. An agreement may be entered into for the smallest of matters to the largest of issues. Agreements in India are governed by the Indian Contract Act and in addition by specific statutes depending upon the nature of the agreements. For instance, an agreement to assign a copyright must bear in mind the provisions of the Copyright Act, 1957. In addition, certain taxing statutes, such as the Stamp Act, contain certain provisions which must be borne in mind while executing the agreement. It is interesting to note that there is no specific format for an agreement. There are various ways in which an agreement can be drafted. The American style of drafting is substantially different from the English style. However, it is important that it contains the vital provisions or else the purpose behind the agreement would be defeated. This Chapter looks at some of the important parts of an agreement.

2. Standard Clauses

2.1.Name Clause

This is the first part and contains the names and addresses of the parties to the agreement. It also specifies whether the agreement includes the heirs, assigns, executors, successors, administrators, etc., of the parties to the agreement. In case there is no provision for an assignment then it would be difficult for any party to do so. This clause also contains the Date of the Agreement when it is executed.

2.2.Recitals

The recitals give a brief background about the agreement. They explain the purpose behind the agreement and the objectives which it seeks to achieve. In case of property conveyancing documents, the recitals also contain a brief title history of the property. The recitals are an integral part of the document and should be carefully drafted so that it becomes easy to construe the agreement.

2.3.Representations and Warranties

This is a very important clause and due care and precaution is required while drafting the same. The parties give out certain representations and warranties in this clause and hence, if they turn out to be false then the other party has a right of action against the party making such false statements. For instance in a flat sale agreement, the flat seller can give a representation that he has not sold or mortgaged the flat to any other party and if there is a claim to the contrary, then he would indemnify the flat purchaser. This clause is also very significant in a Shareholders’ Agreement or a Joint Venture Agreement.

2.4.Prior Permissions and Approvals

Quite often, it may happen that a particular agreement is subject to prior permission from Governmental authorities. In this case, the agreement must clearly mention its conditional nature or else it may be a cause for action. For instance, a share subscription agreement which requires the prior FIPB / RBI permission must clearly state so. In the event the permission is refused then the agreement would terminate.

2.5.Costs and Charges

This Clause mentions who would bear various expenses, professional fees, etc. pertaining to and incidental to the agreement. This may also include the stamp duty cost in case of a transaction pertaining to an immovable property. It is always a good practice to have a clear understanding on this front so as to avoid disputes later on.

2.6.Notice

This clause lays down the address and contact details of the parties in case any notice, demand or other communication is to be delivered to them by any of the parties to the agreement. It provides complete postal address, telephone, fax, etc. Emails as a form of notices are frowned upon by many people and hence, not included.

2.7.Arbitration

In this Clause, the parties agree that all the disputes between them shall be amicably settled. In the event of failure to do so, the same shall be settled by an arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 shall apply. This is a very vital part as in its absence all disputes would go to Court and that would be a long drawn out process.

The clause normally provides the place of arbitration and the language of the proceedings. It also mentions that all arbitral awards given in respect of disputes referred to arbitration in accordance with the provisions of this Clause shall be final and binding on all parties concerned

The importance of drafting this clause carefully in case of international contracts cannot be overstressed.

2.8.Variation

Variation to the agreement shall be binding on any of the parties only if and to the extent, such variation is recorded in a written document executed between the parties.

2.9.Confidentiality

Several agreements, such as joint venture agreements, share purchase agreements, etc., contain a Confidentiality Clause. It provides that the parties would not disclose any information to a third person unless there are circumstances such as statutory requirements, etc. In certain highly sensitive agreements it is also provided that the leakage of information may be taken as a ground for termination of the agreement.

2.10.Force Majeure

“Man proposes and Nature Disposes”. The best of intentions and actions are sometimes undone by acts of God or forces of nature. These include, but are not limited to any Act of God, strike, lockout, labour dispute, epidemic, cyclone, flood, earthquake, drought, fire, explosion, atmospheric disaster, war, riot, revolution, etc. In times like these, it becomes impossible to perform one’s obligations under an agreement. Hence, the Force Majeure Clause provides that no party shall be liable for any default or delay in the performance of his obligations when such default or delay is due to any contingency beyond his reasonable control.

2.11.Schedules

These are the Schedules, if any, which have to be annexed to the agreement. For instance, in a conveyancing document, it would contain the description of the property being conveyed along with a property map. Schedules are also a part and parcel of the agreement and are as important as the main agreement.

2.12.Signature Clause

This is the Clause where the parties to the agreement sign. Each person signs in the presence of a witness. The witness need not know the contents of the agreement. All he has to certify is that the person signing has done so in his presence. There can be one witness for all signatories. The capacity in which a person is signing must be mentioned in case he is doing so for and on behalf of someone else, e.g., the Director of a Company, Partner of a Firm, Guardian of a minor, etc. In addition to signing in the Signature Clause, normally, each page is also initialled as a mark of identification.

3. Novel Clauses

3.1.Transaction Clause

This is the heart of the Agreement as it deals with the Transaction contemplated therein. For instance, in a Share Purchase Agreement, this Clause would lay down that the seller is interested in selling certain number of shares and the buyer is interested in purchasing them It would also lay down any conditions precedent which must be fulfilled by either party for the successful completion of the transaction. This Clause requires the utmost scrutiny and care while drafting.

3.2.Consideration Clause

One of the important tenets of Contract Law is that “No Consideration, No Contract”. A contract without any consideration is void ab initio except in certain cases. This Clause mentions the consideration payable in respect of the obligations of the party and should carefully scrutinised since it creates obligations for either party. Thus, in case of a share purchase agreement, the consideration clause would mention the price per share and the aggregate consideration. It would also mention the mode and the time of discharge of the consideration.

3.3.Escrow Mechanism

Certain agreements provide for an Escrow Mechanism with a reputed person, e.g., a commonly accepted solicitor or a CA. The Escrow Holder would retain in his custody the payment or documents due to the other party until such party fulfills his part of the obligations. For instance, in case of the sale of a property which is the subject matter of a mortgage, the buyer may deposit the consideration in Escrow till such time as the Seller clears the mortgage. As soon as the mortgage is redeemed, the Escrow Holder would hand over the consideration to the Seller. The events under which the Escrow Holder would release the Escrow should be very clearly specified in unambiguous terms. Escrow Mechanisms are increasingly used in agreements and are a common feature in agreements for complex infrastructure / power projects.

4. Director’s Responsibility

4.1.As agreements are the basis on which a company functions, it is imperative that they are properly drafted and safeguard the company’s interests. If the agreements suffer from some infirmity or legal handicap, then the company may have to incur severe losses. Hence, Directors must be extremely careful and cautious in all such matters. The best way to ensure this is to entrust the task to competent professionals wherever possible. The old adage better safe then sorry should always be borne in mind.

5. Auditor’s Duty

5.1.This is one area where the Auditor can make substantial value addition. As an Auditor one comes across several agreements which the auditee would enter into the course of business. The Auditor would refer to many of these agreements during his audit. He may check these agreements and advise the auditee whether those contracts are legally valid or do they suffer from some patent infirmity due to which the entity may suffer heavily. All agreements, have economic implications, which if material, impact the true and fair view.

5.2.Even otherwise than as an Auditor, a Chartered Accountant can render tremendous services in this area. If Chartered Accountants have a basic knowledge of the important provisions of the Act, they would be able to contribute towards pointing out gross errors or inadequacies in contracts entered into by their clients. This in itself would be a big service to the clients.

5.3.By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

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Reasons in support of decisions making

In England the position at common law is that there is no requirement that reasons should be given for its decision by the administrative authority1. There are, however, observations in some of the Judgments wherein the importance of reasons has been emphasized. In a case, Lord Denning observed that:

“The giving of reasons is one of the fundamentals of good administration.”

Sir John Donaldson observed that failure to give reasons amounts to denial of justice. And Lord Lane4 Chief Justice while expressing his reservation on the proposition that any failure to give reasons means a denial of justice, observed that:

“A party appearing before a tribunal is entitled to know either expressly stated by the tribunal or inferentially stated, what it is to which the tribunal is addressing its mind.”

The Committee on Minister’s powers in its report submitted in 1932, recommended that “Any party affected by a decision should be informed of the reasons on which the decision is based” and that “such a decision should be in the form of a reasoned document available to the parities affected.”

The Committee on Administrative Tribunals and Inquiries (Franks Committee) has observed that:

“Almost all witnesses have advocated the giving of reasoned decisions by tribunals. We are convinced that if tribunal proceedings are to be fair to the citizen reasons should be given to the fullest practicable extent. A decision is apt to be better if the reasons for it have to be set out in waiting because the reasons are then more likely to have been properly thought out. Further, a reasoned decision is essential in order that, where there is a right of appeal, the applicant can assess whether he has good grounds of appeal and know the case he will have to meet if he decides to appeal.”

The recommendations of the Donoughmore Committee and the Franks Committee led to the enactment of the Tribunals and Inquiries Act, 1958 in the United Kingdom. Section 12 of that Act prescribed that it shall be the duty of the tribunal or Minister to furnish a statement, either written or oral, of the reasons for the decision if requested, on or before the giving of notification of the decision to support the decision. The said Act has been replaced by the Tribunals and Inquiries Act, 1971 which contains a similar provision in section 12. This requirement is, however, confined, in its applications to tribunals and statutory authorities specialized in Schedule I to the said enactment. In respect of the Tribunals and authorities that are not covered by the aforesaid enactment, the position, as prevails at common law, applies. The Committee of Justice in its report, administration under Law, submitted in 1971, expressed the view that:

“No single factor has inhibited the development of English administrative law as seriously as the absence of any general obligation upon public authorities to give reasons for their decisions.”

In United States the Courts have insisted upon recording reasons form the viewpoint of fairness in administrative decisions and in fact the administrative authorities are obliged to do so. The Law in Canada appears to be the same as in England. Lord Denning in Breen’s case (supra) said that the administrative law is now firmly developed in England and thereafter observed that giving of reasons is fundamental of good administration. In England there is no general rule, however, that reasons are always necessary in administrative decision making, and not treated as part of the principles of natural justice. (Position appears to have been changed after reform and report)

Position in India is on stronger footing in view of charter of fairness encrypted under Article 14 of the Constitution. India has accepted that giving of reasons represents the substance and essence of principles of natural justice and is thus treated as part of principles of natural justice. It can definitely argued that the reasons is the link between the material on record and the actual mental process of the adjudicating authority that can establish the rationale as to how the adjudicating authority has applied his mind in given set of facts and circumstances of the case.

It would be very profitable to quote the Judgement of the Supreme Court6 at this stage where it was stated that:

“The absence of arbitrary power is the first essential rule of law upon which our whole constitutional system is based. In a system governed by rule of law, discretion when conferred upon executive authorities must be confined within clearly defined limits.. the decision should be predictable one.”

The person has a right to know the reasons when he is adversely affected in terms of purse, property or liberty. If the basis for reasoned decisions are not formulated, then it is more a case of judiciary being deprived to screen the mental eventualities of executives who might have otherwise acted arbitrarily.

Gujarat High Court in Pirbhai Janubhai observed that: (Scrapped decision)

“… neither principle nor authority requires that a quasi judicial body giving its decision must give reasons in support of the decision (!). The only qualification to this rule is where an appeal is provided against the decision of the quasi-judicial body. In such a case the necessity of giving reasons in support of the decision is imposed because unless reasons are given, it would not be possible for the appellate authority to examine the correctness of the decision. But apart from such case, there is no obligation on a quasi judicial body to give reasons in support of the decision arrived at by it so long as the decision is reached after observing the principles of natural justice.”

While the aforesaid decision was given by the Division Bench of the Gujarat High Court, the case of Bhagat Raja that shall be referred to hereafter was pending for judicial determination before the Supreme Court of India and in the meanwhile a reference was made to the larger Bench of the Gujarat High Court in view of the aforesaid decision rendered by his Lordship Justice P. N. Bhagwati and the decision in Special Civil Application No. 638 of 1965 decided on 7th of September, 1965 (Gujarat High Court) as to whether a conciliation officer, who is exercising quasi judicial functions is as such amenable to the jurisdiction of the High Court under Article 226 and is bound to make a speaking order or, in other words, he must give reasons in the order.

Correcting earlier judgment9 in view of the Supreme Court Judgements Chief Justice P. N. Bhagwati observed on behalf of larger Bench that:

“Both on principle and on authority every administrative officer exercising quasi judicial functions is bound to give reasons in support of the order he makes. A conciliation Officer exercises quasi judicial function while hearing and disposing of an application by the employer under the proviso to section 33 (2) (b) of the Industrial Disputes Act by which he seeks the approval of the Conciliation Officer for discharging its employee during the dependency of an Industrial Dispute before the said authority…”

Two factors were considered as to why quasi-judicial authority must state the reasons. It was held that:

“The necessity of giving reasons flows as a necessary corollary form the rule of law which constitutes one of the basic principles of the Indian Constitutional set-up. The administrative authorities having a duty to act judicially cannot therefore decide on considerations of policy or expediency. They must decide the matter solely on the facts of the particular case, solely on the material before them an apart from any extraneous considerations by applying pre existing legal norms to factual situations. Now necessity of giving reasons is one of the important safeguards to ensure observance of the duty to act judicially. It introduces or, at any rate, minimizes arbitrariness in the decision making process.”

Another reason was that:

“Another reason which compels making of such an order is based on the power of judicial review which is possessed by the High Court under Article 226 and the Supreme Court under 32 of the Constitution.”

The specified authority under the Act is obliged to consider the facts for giving or refusing to give the approval in connection with discharge of Industrial worker during the pendency of reference. Quasi-judicial authority, in the facts and circumstances of the case, was bound by law to render his decision supported by reasons.

The Law Commission in the 14th Report relating to form in judicial administration suggested that:

“In the case of administrative decisions provisions should be made that they should be accompanied by reasons. The reasons will make it possible to test the validity of these decisions by the machinery of appropriate writs.”

The Law Commission suggested remedying the loopholes, but unfortunately no general duty so far has been created to furnish the reasons in support of administrative decision making. In some of the Judgements, the question as to whether the adjudicating authority is expected to support his decision by reasons was not very effectively answered, but the dividing line between the quasi judicial action and administrative action was considered by the Supreme Court. Ridge V/s Baldwin rendered valuable assistance that the Supreme Court respectfully accepted.

In case of Harinagar Sugar Mills Case10 the Court observed that:

“If the Central Government acts as a tribunal exercising judicial powers and the exercise of that power is subject to the jurisdiction of this Court under Article 136 of the Constitution we fail to see how the power of this court can be effectively exercised if reasons are not given by the Central Government in support of its order.”

Safeguarding the interest of the Citizens in a Welfare State, the Supreme Court in Madhya Pradesh Industries11 observed that:

“In the context of a welfare State, administrative tribunals have come to stay. Indeed they are the necessary concomitants of a welfare State. But arbitrariness in their functioning destroys the concept of a Welfare State itself. Self-discipline and supervision exclude or at any rate minimize arbitrariness. The least a tribunal can do is to disclose its mind. The compulsion of disclosure guarantees consideration. The condition to give reasons introduces clarity an excludes or at any rate minimizes arbitrariness, it gives satisfaction to the party against whom the order is made, and it also enables and appellate or supervisory court to keep the tribunals within bounds. A reasoned order is a desirable condition of judicial disposal.”

It was further observed that:

“If tribunals can make orders without giving reasons, the said powers in the hands of unscrupulous or dishonest officers may turn out to be a potent weapon for abuse of power. But, if reasons for an order are to be given, it will be an effective restraint on such abuse, as the order, if it discloses extraneous or irrelevant considerations will be subject to judicial scrutiny and correction. A speaking order will at its best be a reasonable and at its worst be atleast plausible one. The public should not be deprived of this only safeguard.”

Sometimes, the adjudicating authority passes an order in the proceedings that would be subject to appeal and the question would be whether the appellate or revisional authority affirming the order in appeal or revision without a speaking order is sustainable in law. The appellate or revisional authority in many cases disposes of the proceedings in one word “dismissed” or rejected, but this practice would be unreasonable. The Supreme Court in Bhagat Raja held such practice to be completely unsatisfactory.

In Mahavir Prasad Santoshkumar13 the Supreme Court observed that:

“The practice of the executive authority dismissing statutory appeal against orders which prima facie seriously prejudice the rights of the aggrieved party without giving reasons is a negation of the rule of law.”

The Supreme Court further observed that:

“Recording of reasons in support of a decision on a disputed claim by a quasi judicial authority ensures that the decision is reached according to law and is not the result of a caprice, whim or fancy or reached on gourds of policy or expediency. A party to the dispute is ordinarily entitled to know the grounds on which the authority has rejected his claim. If the order is subject to appeal, the necessity to record reasons is greater, for without recorded reasons the appellate authority has no material on which it may determine whether the facts were properly ascertained, the relevant law was correctly applied and the decision was just.”

In this case the District Magistrate had cancelled the license granted under the Licensing Order, without giving any reasons and the State Government also dismissed the appeal without recording the reasons in support thereof. The Court in this case tresses the need of passing a speaking order by the original adjudicating authority and insisted that the recording of reasons assumes great importance especially when the order is made subject to appeal. Since the giving of reasons in support of decision is accepted to be part of principles of natural justice, even original administrative authority owes a duty to pass a speaking order. In woolcombers of India Limited the Supreme Court observed that:

“The giving of reasons in support of their conclusions by judicial and quasi judicial authorities when exercising initial jurisdiction is essential for various reasons. First, it is calculated to prevent unconscious, unfairness or arbitrariness in reaching the conclusions. The very search for reasons will put the authority on the alert and minimize the chances of unconscious infiltration of personal biased or unfairness in the conclusion. The authority will adduce reasons which will be regarded as fair and legitimate by a reasonable man and will discard irrelevant or extraneous considerations. Second it is a well known principle that justice should not only be done but should also appear to be done. Unreasoned conclusions may be just but they may not appear to be just to those who read them. Reasoned conclusions, on the other hand, will have also the appearance of justice. Third, it should be remembered that an appeal generally lies from the decision of judicial and quasi-judicial authorities to this Court by Special leave granted under Article 136. A Judgement which does not disclose the reasons will be of little assistance to the Court.”

Siemens Engineering & Manufacturing Company of India Ltd15completely voids the administrative attitude of the Central Government. Justice Bhagwati observed:

“If Courts of law are to be replaced by administrative authorities and tribunals, as indeed, in some kinds of cases, with the proliferation of administrative law they may have to so replaced, it is essential that administrative authorities and tribunals should accord fair and proper hearing to the persons sought to be affected by their decisions and give sufficiently clear and explicit reasons in support of the orders made by them. Then alone administrative authorities and tribunals, exercising quasi-judicial functions will be able to justify their existence and carry credibility with the people by inspiring confidence in the adjudicatory process. The rule requiring reasons to be given in support of an order is, like the principle of Audi alteram partem, a basic principle of natural justice which must inform every quasi judicial process and this rule must be observed in its proper spirit and mere pretense of compliance with it would not satisfy the requirement of law.”

After having pronounced this Judgement, the Central Government transferred its business to the Tribunal.

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Before you file a case

There are a few essentials that help the process of filing a court case, easier. Here, a lawyer gives some tips on how to prepare for the final application to the court.

* Make all complaints in written form.
* Photocopy every paper, every document that you write, mail or send to people.
*  Whenever you submit a document to somebody, get a ‘Received’ stamped on the photostat copy.
*  File the photocopies of the originals in chronological order.
*  File the photocopies, with ‘Received’ stamped on them, again in chronological order – in a file separate from the  photocopies of the originals. This will help if you ever lose any document.
*  Keep your eyes and ears open for cases related to your case. If you hear of similar cases, note them down; if you come  across news clippings; file them (and put a photocopy in the relevant file); if you know somebody who has gone through  a similar experience or filed a similar case, talk to them. Refer them to your lawyer.
*  If dealing with the government, try to get hold of any public circulars, notifications or written regulations, which could  strengthen your case. File them and their photocopies separately.
*  If a government department is not giving you the documents or information you need, apply under the Right To  Information (RTI.) Act. This may take about a month to bear results.
*  If your case is employment-related, gather all the rules of conduct, hiring/firing regulations, employment codes, etc, of  the organization you are appealing against.

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Critical Analysis of Inter-State Works Contract

After amendment to the constitution by inserting Article 366(29A) providing definition of the term “taxes on sale or purchase of goods” to include deemed sales, States were empowered to levy tax on sale or purchase of goods involved in execution of works contracts. However, the power of States to levy tax on deemed sales including works contract sales are subject to restrictions contained in Article 286 of the Constitution of India. Under Article 286 State has no power to levy tax on –

i) sale or purchase of goods effected in the course of inter-State trade or commerce,

ii) sale or purchase of goods effected in the course of export,

iii) sale or purchase of goods effected in the course of import and

iv) sale or purchase of goods effected outside the State.

Further, power of States to levy tax on sale or purchase of goods of special importance, in the course of inter-State trade and commerce is subject to further restrictions as may be prescribed by the Parliament.

The Central Sales Tax Act, 1956 (hereinafter referred to as the Act) provides for levy of tax on inter-State sales as well as determines rules when any sale or purchase of goods shall be deemed to be effected in thecourse of inter-State trade or commerce, import or export and outside the State. It also provides the list of goods of special importance and contains restrictions on power of States to levy tax on sale or purchase of such declared goods.

The SC in case of Gannon and Dunkerley 73 STC 373, as also later in 88 STC 204 held for the first time that power of States to levy tax on deemed sale or purchase of goods is subject to restrictions provided in Article 286. Accordingly, States have no power to levy tax on deemed sale or purchase of goods effected in the course of inter-State trade or commerce, import, export or effected outside the State. Although CST Act was not amended, the provisions of CST Act determining;–

– situs of sale,

– when sale or purchase of goods is deemed to be effected in the course of inter-State trade or commerce, and

– when sale or purchase of goods is deemed to be effected in the course of import or export shall apply to deemed sales.

At the same time, no tax was payable under the CST Act on deemed sale of goods effected in the course of inter-State trade as the definition of sale provided in the Act did not include such deemed sales.

The Finance Act, 2002 amended CST Act, 1956, from 11-5-2002 by substituting section 2 (g), the scope of definition of the term ‘sale’ is widened. The definition of the term ‘sale’ is brought at par with definition of the term ‘Taxes on sales’ contained in Article 366(29A) of the Constitution of India.

No corresponding or consequential amendment was made in other provisions of the Act by the said Finance Act.

The definition of the term “sale price” of the CST Act was amended by the Finance Act, 2005 from 13-5-2005, whereby a proviso was inserted in section 2(h) ofthe Act. Accordingly, for works contract sales, the Central Government is given power to prescribe by way of rule to determine the sale price of goods in a prescribed manner by making such deduction from the total consideration for the workscontract as may be prescribed. Till date no such rules are prescribed.

Similarly, sub-clause (ja) is inserted in section 2 of the CST Act by Finance Act, 2005 defining the term “works contract”.

Inter-State sale-S.3

i) Section 3 of the CST Act, provides for principals to determine when a sale or purchase of goods takes place in the course of inter-State trade or commerce.

We have settled law and principles on provisions of section 3 of Central Sales Tax Act, 1956 to determine when sale of goods takes place in thecourse of inter-State trade or commerce. These principles have been applied by the courts in case of deemed sales like works contract and lease transactions. After the amendment to CST Act, 1956, by Finance Act, 2002, the position is very clear for application of provisions of section 3 to the deemed sales.

ii) Salient feature of inter-State sales

The salient feature of inter-State sales on the basis of rulings of various courts are as under:

1. The contract of sale occasions movement of goods from one State to another.
2. The movement of goods has occasioned under a contract of a sale.
3. The property in goods may pass in the same State. In other words it is not necessary that property in goods must pass in the other State.
4. The movement of goods may precede the sale or the movement followed by a sale.
5. There may be an express term or covenant for inter-State movement of goods in the contract itself or may be implied from the facts of the case.
6. Situs of a sale is immaterial for determining the inter-State nature of sale.
7. There must be an inextricable link between movement of the goods from one State to another and the contract of sale.
8. Inter-State stock transfer to branch against specific order or against contract of a sale, occasions inter-State movement of goods and are inter-State sale.

i) U/s 3(b) of CST Act, a sale which is effected by transfer of document of title to the goods while the goods are in transit, is also an inter-State sale.

ii) Inter-State Works Contract sales

The provisions of section 3 also apply to works contract sales. The test to determine inter-State sales depends upon inter-State movement of goods under the contract of a sale.

In case of works contract sales, inter-State movement of goods takes place of goods with which works contract is executed as well as processed goods. In both cases, a sale is deemed to have effected in the course of inter-State trade and liable to pay tax under the CST Act.

The Gauhati High Court in case of M/s Projects and Services (82 STC 89) held that when contract is undertaken by a contractor situated outside the State of Tripura and goods are brought in to the State of Tripura from the place outside the State for execution of the workscontract in the State, it is an inter-State sale.

The Punjab & Haryana High Court, in case of M/s Hindustan Thompson Printing Press (100 STC 417) held that when lottery tickets are printed in the State of Haryana and delivered to a dealer in other State then it is an inter-State sale.

The Maharashtra Tribunal in M/s. Bhandari Metal SA 1619/94 dt. 23-1-1998 (Ref. rejected on 31-3-2001) followed decision of East India Cotton Mfg. (90 STC 221) and held that when dealer in Maharashtra received goods from the other State dealer for processing and after process, the processed goods are delivered to him outside the State, then it is an inter-State sale.

Generally, for the purpose of determining inter-State sale, the inter-State movement of goods in which property is passed, is to be considered. However, for determining inter-State workscontract sales, Courts in case of Hindustan Thompson 100 STC 417 and other cases have considered the inter-State movement of processed goods also, although no property in such goods is passed.

In view of above, the inter-State works contract sale takes place when not only the contract occasions inter-State movement of goods with which contract is executed but also when it occasions inter-State movement of processed goods.

v) Sale by transfer of document of title to the goods S-3(b).

Under section 3 (b) of the Act, any sale effected by transfer of document of title to the goods while goods are in transit from one State to anothet is also an inter-State sale and exempt from payment of tax under section 6 (2) ofthe Act. The issue is whether there can be such inter-State works contract sale?

In case of works contract, the property in goods passes as and when goods are used in works contract and not on delivery of goods. Section 3 (b) of the Act provides for passing of property in goods in a particular manner; i.e., by transfer of document of title to the goods. Unless, the property in goods passes by transfer of document of title to the goods, while it is in transit from one State to another the provisions of section 3(b) and section 6(2) are not applicable.

As discussed above, in case of works contract, the property in goods does not pass by transfer of document of title to the goods but it passes as and when goods are used in works contract. Therefore, the provisions of sections 3 (b) and 6(2) do not apply to works contract sales. As such, the exemption from payment of tax cannot be claimed and tax will have to be payable on such transaction.

However in such cases, it is possible to contend that contract is not an indivisible works contract but divisible contract involving sale of goods by transfer of document of title to the goods as such exempt from payment of tax under section 6(2) of the CST Act, subject to production of required form C and E-I.

Sale in the course of import or export – Section 5

Under section 5 of the CST Act, no tax is payable on any sale or purchase of goods which occasions import of goods into India or export of goods outside India. Further any sale of goods effected by transfer of document of title to the goods before it crosses the custom frontier of India, popularly known as High seas sale, is also exempt from payment of tax under section 5(2) of the Act. Under section 5(3) of the CST Act, any sale of goods to the exports to comply terms of any pre existing export order is also exempt from payment of tax, subject to production of form H.

The provisions of section 5 apply to works contract sales also, even prior to amendment to section 2(g) of the Act from 11-5-2002. Because, the exemption under section 5 is in fact under article 286 of the Constitution and section 5 of the Act only provides rules for determining when any sale or purchase of goods shall be deemed to be effected in the course of import or export. The SC in case of Gannon and Dunkerly 73 STC 373 held that power of State to levy tax on sale or purchase of goods including deemed sales is subject to restrictions contained in article 286 of the Constitution of India. Therefore, State has no power to levy any tax on deemed sale of goods including works contract sales covered by section 5 of the Act.

The Commissioner of Sales Tax in case of Mazgaon Dockyard (DDQ dt. 31-10-1995) allowed the claim of the dealer for exemption under section 5(2) of the Act and held that when under the contract, the good are imported by the contractor under the specific terms of the contract and used in works contract then it has occasioned movement of goods from outside India and exempt under section 5(2) of the CST Act.

Levy of CST on Works Contract sales

i) After the amendment by Finance Act, 2002, by substitution of definition of ‘sale’ to include “deemed sales including works contract sales”, it is possible to levy tax under the CST Act on deemed sales taking place in the case of inter-State trade.

ii) The levy of tax is provided in section 6 of the Act. As per section 6 of the Act, every dealer from the date notified by the Government, not earlier than 30 days, is liable to pay the tax. In exercise of the power, the Government of India had issued notification No. SRO 940A dated 26-3-1957 notifying 1-7-1957 as the date from which tax was payable under the Act. Subject to provisions of section 6 (2), the tax is payable on turnover of sales at the rate of tax as per provisions of section 8 of the Act.

iii) Works Contract – Section 2(ja)

The term ‘works contract’ is defined in section 2(ja) of the Act. Accordingly, ‘works contract’ means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property. Therefore any inter-State sale of goods involved in execution of works contract as defined in section 2(ja) is liable to pay tax under the Act.

iv) Sale Price / Turnover of sales – Ss-2 (h) and (j)

The tax under the CST Act is payable on turnover of sales. The term ‘turnover of sales’ is defined in section 2(j) to mean aggregate of the sale price received or receivable for sale of the goods. The term ‘sale price’ is defined in section 2(h) to mean amount paid or payable for sale or purchase of goods etc. Pursuant to the amendment by Finance Act, 2002, no consequential amendment was made in these clauses. The Finance Act, 2005 inserted a proviso to section 2(h) giving power to the Government to prescribe manner of determination of sale price by making deductions from total consideration, as may be prescribed. Till date no such rules are prescribed.

In absence of such rules, whether CST is payable on entire contract value?

The SC in case of 2nd Gannon Dunkerley’s case 88 STC 204 held that in case of works contract, tax is payable on value of goods deemed to be sold while executing works contract. The entire contract value is not taxable. The deductions for labour and other services are to be made from total contract value for determining value of goods sold for levy of tax.

In view of above decision of SC, States have provided rules to determine sale price of goods in case of works contract sales.

The SC in case of M/s. Mahim Patram 6 VST 248 (SC) held that till Rules are prescribed by government to determine sale price of works contract sales, State rules shall be applicable to determine sale price of the goods for levy of tax under the CST Act.

Therefore, in Maharashtra, provision of rule 58 shall apply for determination of sale price for levy of CST.

v) Issue of Form C

As a result of amendment by Finance Act, 2002, the dealer can issue Form C for purchase of goods in the course of inter-State trade for the purpose of works contract sales. Prior to the amendment by administrative circular, the Commissioner of Sales Tax in Maharashtra had allowed the purchase of goods on C form to the contractor for purchase of goods which are used in works contract on which tax is paid under the earlier Works Contract Act. After the amendment to definition of “sale” to include “deemed sales”, the dealer is entitled to issue Form C as the term “sale” appearing in section 8 will also include works contract sales.

At the same time while purchasing any goods, by way of works contract which are involved in execution of works contract for use in manufacturing or processing of goods or packing of goods for sale or resale etc., the C form can be issued by the employer.

vi) Rate of tax – S.8

As per section 8 of the Act, in case of sales not supported with Form C or D the tax is payable at the rate applicable inside the appropriate State under the General Sales Tax laws. The tax will be payable at the rate of tax payable under the local Act applicable to the goods sold.

As discussed earlier, in works contract sales, tax is payable on the sale of goods which takes place as and when goods are used in works contract. Therefore, for the purpose of determination of rate of tax, the form of goods in which sale takes place is to be considered. In case of sale of goods against Form C, at present, rate of tax is 2%. In any other case, rate of tax will be local rate of tax applicable to the goods sold.

Under section 8 of the Act, sales to the SEZ or developer of SEZ, is exempt from payment of tax against Form I. This provision is applicable to works contract sales also. Accordingly, no tax is payable under the Act on inter-State works contract sales to SEZ unit or developer of SEZ against Form I.

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Indo-US Nuclear Treaty – A fraud on the nation

Balasubrahmanyam  Kamarsu                                                                                                                                                  Advocate,  Suprem Court of India                                                                                                     

Prime Minister Dr. Manmohan Singh and UPA chairperson Smt Sonia Gandhi have committed a fraud on the nation by obtruding a nuclear deal that seriously compromises India’s strategic sovereignty and right of nuclear tests. The UPA constituent parties have fully endorsed the anti-national conspiracy hatched by the Congress. The Congress led UPA government has not only mortgaged the eight decade indigenous and self reliant nuclear technology but also tried to nullify the glorious achievements by the Indian scientists in the field of nuclear science. The Singh-Sonia duo concealed all the relevant and vital issues and facts of the Indo-US agreement and approached the IAEA stealthily. The Congress and UPA leader’s assurances on assured fuel supply and transfer of technology proved to be a hoax.

The nationalist forces have been cautioning the UPA government about the adverse impacts of the Indo-US nuclear agreement. Learned persons from all walks of life – intellectuals, scientists, legal experts, professors and social activists have time and again cautioned the persons in UPA about the imminent dangers of the 123 Agreement in the present form.

Nullified Vajpayee’s legacy

Explaining the hidden threats of the 123 Agreement, the Indian intelligentsia said that this agreement in the present shape is an attempt to circumvent the Nuclear Proliferation Treaty (NPT) and Comprehensive Nuclear Test Ban Treaty (CTBT). NPT is an international treaty to limit the spread of nuclear weapons. Currently, 189 countries are party to this treaty. Five of which have nuclear weapons – United States of America, United Kingdom, France, Russia and China. India did not sign NPT alleging that the treaty creates a club of ‘nuclear haves’ and a larger group of ‘nuclear have-nots’ and the treaty never explains on what ethical grounds such a distinction is valid. CTBT bans all nuclear explosions in all environments, for military or civil purposes. CTBT has been signed by 177 countries and India is not a signatory to this treaty.

All the American interlocutors, whether belong to the Republican Party or the Democratic Party or are independent experts, have made it clear that, as far as their country is concerned, their principal objective is to bring India into the Non-Proliferation Regime. What they want fits in well with the critical stand that Dr. Manmohan Singh took after Pokharan II in 1998. Both want India to come within the Non-Proliferation Regime dicated by the US.

The Manmohan Singh Government has deliberately and knowingly did not heed to the warnings and misled the people and the Parliament of India on this deal. It is now crystal clear that India will lose the right to nuclear tests forever as a result of this 123 Agreement. This agreement seriously jeopardise the great achievements of Sri Atal Bihari Vajpayee government’s nuclear deterrence. The entire world recognized India as a nuclear weapon state following the successful conduct of Pokhran II. In May 1998, the Atal Bihari Vajpayee led NDA government conducted multiple nuclear tests and declared its nuclear capability. India successfully detonated five ‘thermo-nuclear weapons.’ On Monday 11 May 1998, India declared itself a full fledged nuclear armed State.

Besides, India confidently countered several international sanctions. The entire nation firmly stood by the Vajpayee government. India courageously fought and withstood economic sanctions imposed by major countries in the world. When India refused to succumb, these countries have lifted the sanctions unilaterally. India repudiated discriminatory non-proliferation obligations.

The UPA government headed by a weak Prime Minister Dr Manmohan Singh has compromised on this great legacy and hypothecated India’s interests to foreign nations. 

LIES, LIES AND LIES

The irony is that Dr Manmohan Singh and his colleagues in the cabinet, Congress president Sonia Gandhi and her associates in the party, the allied parties of the UPA indulged in perjury and concocted illogical theories to defend the 123 agreement. The greatest misery is that the Prime Minister himself indulged in issuing false and misleading statements over the past three and a half year. He lied to the people of India and Parliament that Hyde Act is not binding on 123 Agreement and India is free to conduct nuclear tests in future.

Besides earlier statements, the Prime Minister’s office on July 2, 2008 said that ”the 123 Agreement clearly overrides the Hyde Act and this position would be clear to any one who goes through the provisions.” But, the letter sent by the Bush administration to Chairman of the House on Foreign Affairs Committee on January 16, 2008, completely exposes the Government of India and the fraudulent claims it has been making about the merits of the nuclear deal. The Bush administration clearly stated that the proposed 123 Agreement is in full conformity with the Hyde Act and in the event India detonated a nuclear explosive device then the USA has the right to cease all nuclear co-operations with India immediately including the supply of fuel as well as to request the return of any items transferred from USA including fresh fuel.

United States – India Peaceful Atomic Energy Co-operation Act – popularly known as –Hyde Act is an act adopted by US Congress providing exemptions to India with regard to nuclear science. This is a domestic Act of United States of America. This Act provides legal  basis for 123 Agreement with India. United States – India Peaceful Atomic Energy Co-operation Act of 2006 is the legal framework for a bilateral pact between US and India under which the US will provide access to civilian nuclear technology and access to nuclear fuel in exchange for IAEA safeguards on civilian Indian reactors. 

Mr Jeffrey T Bergner, Assistant Secretary, Legal Affairs of United States Department of state in a letter to Tom Lontos, Chairman, Committee on Foreign Affairs, House of Representatives categorically stated that — “In his September 19 Statement, Assistant Secretary Boucher twice made clear that we think (the proposed 123 Agreement with India) is in full confirmity with the Hyde Act. Indeed, the Administration is confident that the proposed agreement is consistent with the legal requirements of both the Hyde Act and Atomic Energy Act. The proposed agreement satisfies the particular requirements of Section 123 of the Atomic Energy Act with the exception of the requirements for full-scope safeguards, which the President is expected to exempt prior to the submission of the agreement to Congress for its approval, as provided for in section 104 of the Hyde Act. The agreement is fully consistent with the legal requirements of the Hyde Act.”

Section 106 of the Hyde Act makes the US position clear: “A determination and any waiver under Section 104 shall cease to be effective if the President determines that India has detonated a nuclear device after the date of the enactment of this Act.

What does Section 104 say: “Pursuant to the obligations of the US under Article I of the NPT, nothing in this title constitutes authority to carry out any civilian nuclear cooperation between the United States and a country that is not a nuclear weapon state party to the NPT that would in any way assist, encourage or induce the country to manufacture or otherwise acquire nuclear weapons or nuclear explosive devices.

Further, Mr Bergner stated that — “the US government will not assist India in design, construction, or cooperation of sensitive nuclear techonologies through the transfer of dual-use items, whether under the Agreement or outside the Agreement. The United States rarely transfers dual-use items for sensitive nuclear activities to any cooperating party and no such transfers are currently pending.”

It is clear now that the deal will be terminated and all supplies will be stopped the moment India goes in for nuclear tests and all materials supplied to it will have to be returned.

Devaluing the Prime Minister’s office Dr Manmohan Singh approached the International Atomic Energy Agency (IAEA) in a deceitful manner without first seeking a vote of confidence in Parliament. The draft circulated to the IAEA board members has serious long-term implications for India.

The Prime Minister and the Congress president Sonia Gandhi prevaricated that the Agreement cannot be made public as it is a classified document. The Congress leaders could bluff with the people of India and allies of the UPA but the entire world found it on internet.

The draft Safeguards Agreement has made a mockery of the assurances that Prime Minister Dr.Manmohan Singh had repeatedly given to the nation. Speaking in the Lok Sabha on July 29, 2005, had said: “We shall undertake the same responsibilities and obligations as … the US”; “we expect the same rights and benefits” as the US; and “India will never accept discrimination”. This assurance has been flouted in the Agreement, which does not recognize India as a Nuclear Weapons State (NWS) on par with the United States, Russia, Britain, France and China.

The PM had assured that the Agreement would be “India-specific” – that is less onerous and intrusive than the Agreements with the Non-NWS. He had assured Parliament on August 17, 2006, that, “As a country with nuclear weapons, there is no question of India agreeing to a safeguards agreement or an Additional Protocol applicable to non-nuclear-weapons states of the NPT”.

Far from it being an India-specific agreement, the accord resembles IAEA agreements with non-nuclear-weapons states. With the exclusion of the first two pages that contain the preamble, and a couple of other exceptions, the text is largely modelled on IAEA safeguards agreements with non-nuclear-weapons state. As sought by the United States, the text of the India-IAEA accord has been drawn from the strengthened INFCIRC-66/Rev.2 (16 September 1968) model for NNWS.

India will have none of the rights that the five established nuclear-weapons states have vis-à-vis the IAEA. Nuclear-weapons states accept only voluntary, revocable inspections. Moreover, these five nuclear powers have the sovereign right to terminate their safeguards agreement with the IAEA.

The India-IAEA safeguards accord comes with perpetual, legally irrevocable obligations, which India cannot suspend or end, even if the supplier-states cut off supply of fuel and replacement parts. The IAEA inspections in India will not be nominal but stringent and invasive, of the type applicable to non-nuclear-weapons states.

The draft Agreement is exactly the same – word for word, para by para – as what the US Administration had wanted. India has not only accepted stringent “routine” inspections with “access at all times”, but also “Special Inspections”. Paragraph 63 of the India-IAEA accord states the “Agency may carry out special inspections if: (a) the study of a report indicates that such inspection is desirable; or (b) any unforeseen circumstance requires immediate action. The Board shall subsequently be informed of the reasons for and the results of each such inspection”.

In other words, the Agency will have the right to carry out “special inspections” if it believed any activity at a safeguarded Indian facility or any report raised questions. In the North Korean case, the board had approved the special inspections which the Pyongyang refused to allow. But India, in its accord with the IAEA, has consented to be subject to special inspections without the Board’s prior consent.

While the five established nuclear powers have offered only 11 facilities in total — less than 1% of their total facilities — for IAEA safeguards, India has agreed to place 35 of its facilities under IAEA inspection, according to the civil-military separation plan presented to Parliament by the Prime Minister in 2006.

These facilities include 14 power reactors; three heavy-water plants at Thal-Vaishet, Hazira and Tuticorin; six installations at the Nuclear Fuel Complex in Hyderabad; the PREFRE reprocessing plant at Tarapur; and nine research facilities, such as the Tata Institute of Fundamental Research, Board of Radiation and Isotope Technology and Saha Institute of Nuclear Physics. In addition, the Prime Minister has agreed to shut down by 2010 the Cirus research reactor, which is one of the two research reactors in India producing weapons-grade plutonium. Several of these are generic facilities: nuclear medicine, irradiation of food grains, nuclear energy, and also nuclear weapons.

A source of grave concern for India is the fact that the so-called “Corrective Measures” in the draft Agreement, in the event of disruption of fuel supplies, are dangerously vague and non-specific. For example, the safeguards accord’s Clause 29 reads: “The termination of safeguards on items subject to this Agreement shall be implemented taking into account the provisions of GOV/1621 (20 August 1973)”. Although the text of the GOV/1621 document is not public, its central stipulation is well-known — that facility-specific safeguards shall be “in perpetuity”, allowing for no suspension of international safeguards and shutting out room for corrective measures. Such are the known conditions of GOV/1621 that the rights and obligations of the parties continue perpetually on all nuclear materials until the materials have been returned or all the fissionable material supplied, produced or processed goes out of the inventory.

Under Clause 32 of the India-IAEA accord, New Delhi can withdraw a facility from safeguards with the prior consent of the IAEA but only after “the facility is no longer usable for any nuclear activity relevant from the point of view of safeguards,” which means the installation’s nuclear capability has been dismantled or permanently disabled to the Agency’s satisfaction.

Another cause of concern is that in case of disagreement or dispute, there is no arbitration. India can only represent its case to the Board (Clauses 104 to 106), whose decision has to be implemented by us. If India does not act on its directive, the Board will report India’s non-compliance to the UN General Assembly and Security Council. Past experience has shown that India has rarely received justice when India-related disputes have gone to the UNSC.

The Prime Minister had assured Parliament on August 17, 2006, that, “As a country with nuclear weapons, there is no question of India agreeing to a safeguards agreement or an Additional Protocol applicable to non-nuclear-weapons states of the NPT”. In contrast, the “Additional Protocol” will seek to ensure that specialized equipment, trained personnel, and designs and operating manuals are not transferred from the civilian programme to the military programme. The Hyde Act demands that the “Additional Protocol” for India be “based on a Model Additional Protocol as set forth in IAEA information circular (INFCIRC) 540” — that is, the Protocol applicable to non-nuclear-weapons states.

The following are not provided at all: (a) Assured, uninterrupted fuel supply; (b) strategic reserves of fuel. In 123 Agreement, the promises for uninterrupted fuel supplies are all prospective. In August 2006, the PM had told Parliament, for instance, that: “An important assurance is the commitment of support for India’s right to build up strategic reserves of nuclear fuel over the lifetime of India’s reactors”. The Draft with IAEA carries no reference to the continuation of India’s safeguards obligations being contingent on perpetual fuel supply. The agreement indeed explicitly blocks India from ever undertaking real correction in response to a fuel supply cut-off — the lifting of  IAEA safeguards.

In fact, what was provided even in the 123 Agreement has been given the go-by. Article 5 of the 123 Agreement specified, “In the light of the above understandings with the United States, an India-specific safeguards agreement will be negotiated between India and the IAEA providing for safeguards against withdrawal of safeguarded nuclear material from civilian use at any time as well as providing for corrective measures that India may take to ensure uninterrupted operation of its civilian nuclear reactors in the event of disruption of foreign fuel supplies.”

Clause 3 of the IAEA draft Agreement provides: “The purpose of safeguards under this Agreement is to guard against the withdrawal of safeguarded nuclear material from civilian use at any time” Notice that the words are exactly as provided in the 123 Agreement. But the words that follow in the 123 Agreement are conspicuously missing! Similarly, no reference in operative parts to strategic reserves. Quite rightly too: it is no job of IAEA to help us build stocks of fuel – yet Government spokesmen are saying that the Agreement provides for these!

Lastly, the BJP has been demanding from the Government, right since July 2005, to know the cost of separation of military and civilian facilities. The Government has not given a reply to this important question till date.

While the Government has all along said that the deal is exclusively about nuclear energy, the US Administration and America’s bipartisan political class has left no one in doubt that the deal is all about bringing India into the non-proliferation regime.

The leadership of the Congress party and the Government  is assisting the US in realizing its most important foreign policy objective vis-à-vis India in a manner that has undermined India’s strategic autonomy while promising illusory energy security.

Disrespect for Parliament

Dr Manmohan Singh kept every thing secretive about the Nuclear Deal. He did not discuss the contents of this deal either in Parliament nor with his cabinet colleagues. There was total lack of transperancy. The irony is that the political parties and governments of the countries represented on the Board of Governors of the IAEA have an opportunity to debate the contents of the draft safeguards agreement concerning India, but the people and the political parties in India are deprived of that opportunity.

Dr. Manmohan Singh addressed a press conference in Washington on 20 July 2005, two days after he and US President George Bush issued a joint statement about the Indo-US nuclear deal. One correspondent asked Dr. Manmohan Singh a pointed question: “Mr. Prime Minister, do you see any resistance coming forward from your allies and the opposition in putting the new India-U.S. policy to practice? And will you seek a parliamentary consensus or approval to the new direction you seem to be taking in foreign policy?”

This is how the PM replied. “Well, the Parliament in our country is sovereign,” he said. “It goes without saying that we can move forward only on the basis of a broad national consensus.” If Dr. Manmohan Singh truly believes that “Parliament in our country is sovereign”, why did he not seek a sense of the two Houses before rushing into the 123 Agreement and the safeguards agreement with the IAEA? Not even one all-partmeeting was conducted on this issue. There was a consistent demand for setting up a Joint Parliamentary Committee to study the 123 Agreement. Dr Singh did not accept the demand. Probably the Prime Minister must have thought that the MP s are incapable of giving considered opinion on the issue.

Accountability and transparency are the cornerstones of democratic system of governance. These have been casualties in the functioning of the UPA government. This is best illustrated by the manner in which the government has handled the issue of the Indo-US nuclear deal. Ideally in a democracy, any major international agreement that impinges on India’s national unity, territorial integrity and security must be ratified by Parliament.The Prime Minister has reduced an important agreement between two sovereign nations into a private agreement between two individuals — himself and President Bush. He has behaved as a junior partner in this partnership.

                         (Authour is BJP national Media Co-Convener based in New Delhi)

Balasubrahmanyam  Kamarsu                                                                                                                                                  Advocate,  Suprem Court of India                                                                                                     

Prime Minister Dr. Manmohan Singh and UPA chairperson Smt Sonia Gandhi have committed a fraud on the nation by obtruding a nuclear deal that seriously compromises India’s strategic sovereignty and right of nuclear tests. The UPA constituent parties have fully endorsed the anti-national conspiracy hatched by the Congress. The Congress led UPA government has not only mortgaged the eight decade indigenous and self reliant nuclear technology but also tried to nullify the glorious achievements by the Indian scientists in the field of nuclear science. The Singh-Sonia duo concealed all the relevant and vital issues and facts of the Indo-US agreement and approached the IAEA stealthily. The Congress and UPA leader’s assurances on assured fuel supply and transfer of technology proved to be a hoax.

The nationalist forces have been cautioning the UPA government about the adverse impacts of the Indo-US nuclear agreement. Learned persons from all walks of life – intellectuals, scientists, legal experts, professors and social activists have time and again cautioned the persons in UPA about the imminent dangers of the 123 Agreement in the present form.

Nullified Vajpayee’s legacy

Explaining the hidden threats of the 123 Agreement, the Indian intelligentsia said that this agreement in the present shape is an attempt to circumvent the Nuclear Proliferation Treaty (NPT) and Comprehensive Nuclear Test Ban Treaty (CTBT). NPT is an international treaty to limit the spread of nuclear weapons. Currently, 189 countries are party to this treaty. Five of which have nuclear weapons – United States of America, United Kingdom, France, Russia and China. India did not sign NPT alleging that the treaty creates a club of ‘nuclear haves’ and a larger group of ‘nuclear have-nots’ and the treaty never explains on what ethical grounds such a distinction is valid. CTBT bans all nuclear explosions in all environments, for military or civil purposes. CTBT has been signed by 177 countries and India is not a signatory to this treaty.

All the American interlocutors, whether belong to the Republican Party or the Democratic Party or are independent experts, have made it clear that, as far as their country is concerned, their principal objective is to bring India into the Non-Proliferation Regime. What they want fits in well with the critical stand that Dr. Manmohan Singh took after Pokharan II in 1998. Both want India to come within the Non-Proliferation Regime dicated by the US.

The Manmohan Singh Government has deliberately and knowingly did not heed to the warnings and misled the people and the Parliament of India on this deal. It is now crystal clear that India will lose the right to nuclear tests forever as a result of this 123 Agreement. This agreement seriously jeopardise the great achievements of Sri Atal Bihari Vajpayee government’s nuclear deterrence. The entire world recognized India as a nuclear weapon state following the successful conduct of Pokhran II. In May 1998, the Atal Bihari Vajpayee led NDA government conducted multiple nuclear tests and declared its nuclear capability. India successfully detonated five ‘thermo-nuclear weapons.’ On Monday 11 May 1998, India declared itself a full fledged nuclear armed State.

Besides, India confidently countered several international sanctions. The entire nation firmly stood by the Vajpayee government. India courageously fought and withstood economic sanctions imposed by major countries in the world. When India refused to succumb, these countries have lifted the sanctions unilaterally. India repudiated discriminatory non-proliferation obligations.

The UPA government headed by a weak Prime Minister Dr Manmohan Singh has compromised on this great legacy and hypothecated India’s interests to foreign nations. 

LIES, LIES AND LIES

The irony is that Dr Manmohan Singh and his colleagues in the cabinet, Congress president Sonia Gandhi and her associates in the party, the allied parties of the UPA indulged in perjury and concocted illogical theories to defend the 123 agreement. The greatest misery is that the Prime Minister himself indulged in issuing false and misleading statements over the past three and a half year. He lied to the people of India and Parliament that Hyde Act is not binding on 123 Agreement and India is free to conduct nuclear tests in future.

Besides earlier statements, the Prime Minister’s office on July 2, 2008 said that ”the 123 Agreement clearly overrides the Hyde Act and this position would be clear to any one who goes through the provisions.” But, the letter sent by the Bush administration to Chairman of the House on Foreign Affairs Committee on January 16, 2008, completely exposes the Government of India and the fraudulent claims it has been making about the merits of the nuclear deal. The Bush administration clearly stated that the proposed 123 Agreement is in full conformity with the Hyde Act and in the event India detonated a nuclear explosive device then the USA has the right to cease all nuclear co-operations with India immediately including the supply of fuel as well as to request the return of any items transferred from USA including fresh fuel.

United States – India Peaceful Atomic Energy Co-operation Act – popularly known as –Hyde Act is an act adopted by US Congress providing exemptions to India with regard to nuclear science. This is a domestic Act of United States of America. This Act provides legal  basis for 123 Agreement with India. United States – India Peaceful Atomic Energy Co-operation Act of 2006 is the legal framework for a bilateral pact between US and India under which the US will provide access to civilian nuclear technology and access to nuclear fuel in exchange for IAEA safeguards on civilian Indian reactors. 

Mr Jeffrey T Bergner, Assistant Secretary, Legal Affairs of United States Department of state in a letter to Tom Lontos, Chairman, Committee on Foreign Affairs, House of Representatives categorically stated that — “In his September 19 Statement, Assistant Secretary Boucher twice made clear that we think (the proposed 123 Agreement with India) is in full confirmity with the Hyde Act. Indeed, the Administration is confident that the proposed agreement is consistent with the legal requirements of both the Hyde Act and Atomic Energy Act. The proposed agreement satisfies the particular requirements of Section 123 of the Atomic Energy Act with the exception of the requirements for full-scope safeguards, which the President is expected to exempt prior to the submission of the agreement to Congress for its approval, as provided for in section 104 of the Hyde Act. The agreement is fully consistent with the legal requirements of the Hyde Act.”

Section 106 of the Hyde Act makes the US position clear: “A determination and any waiver under Section 104 shall cease to be effective if the President determines that India has detonated a nuclear device after the date of the enactment of this Act.

What does Section 104 say: “Pursuant to the obligations of the US under Article I of the NPT, nothing in this title constitutes authority to carry out any civilian nuclear cooperation between the United States and a country that is not a nuclear weapon state party to the NPT that would in any way assist, encourage or induce the country to manufacture or otherwise acquire nuclear weapons or nuclear explosive devices.

Further, Mr Bergner stated that — “the US government will not assist India in design, construction, or cooperation of sensitive nuclear techonologies through the transfer of dual-use items, whether under the Agreement or outside the Agreement. The United States rarely transfers dual-use items for sensitive nuclear activities to any cooperating party and no such transfers are currently pending.”

It is clear now that the deal will be terminated and all supplies will be stopped the moment India goes in for nuclear tests and all materials supplied to it will have to be returned.

Devaluing the Prime Minister’s office Dr Manmohan Singh approached the International Atomic Energy Agency (IAEA) in a deceitful manner without first seeking a vote of confidence in Parliament. The draft circulated to the IAEA board members has serious long-term implications for India.

The Prime Minister and the Congress president Sonia Gandhi prevaricated that the Agreement cannot be made public as it is a classified document. The Congress leaders could bluff with the people of India and allies of the UPA but the entire world found it on internet.

The draft Safeguards Agreement has made a mockery of the assurances that Prime Minister Dr.Manmohan Singh had repeatedly given to the nation. Speaking in the Lok Sabha on July 29, 2005, had said: “We shall undertake the same responsibilities and obligations as … the US”; “we expect the same rights and benefits” as the US; and “India will never accept discrimination”. This assurance has been flouted in the Agreement, which does not recognize India as a Nuclear Weapons State (NWS) on par with the United States, Russia, Britain, France and China.

The PM had assured that the Agreement would be “India-specific” – that is less onerous and intrusive than the Agreements with the Non-NWS. He had assured Parliament on August 17, 2006, that, “As a country with nuclear weapons, there is no question of India agreeing to a safeguards agreement or an Additional Protocol applicable to non-nuclear-weapons states of the NPT”.

Far from it being an India-specific agreement, the accord resembles IAEA agreements with non-nuclear-weapons states. With the exclusion of the first two pages that contain the preamble, and a couple of other exceptions, the text is largely modelled on IAEA safeguards agreements with non-nuclear-weapons state. As sought by the United States, the text of the India-IAEA accord has been drawn from the strengthened INFCIRC-66/Rev.2 (16 September 1968) model for NNWS.

India will have none of the rights that the five established nuclear-weapons states have vis-à-vis the IAEA. Nuclear-weapons states accept only voluntary, revocable inspections. Moreover, these five nuclear powers have the sovereign right to terminate their safeguards agreement with the IAEA.

The India-IAEA safeguards accord comes with perpetual, legally irrevocable obligations, which India cannot suspend or end, even if the supplier-states cut off supply of fuel and replacement parts. The IAEA inspections in India will not be nominal but stringent and invasive, of the type applicable to non-nuclear-weapons states.

The draft Agreement is exactly the same – word for word, para by para – as what the US Administration had wanted. India has not only accepted stringent “routine” inspections with “access at all times”, but also “Special Inspections”. Paragraph 63 of the India-IAEA accord states the “Agency may carry out special inspections if: (a) the study of a report indicates that such inspection is desirable; or (b) any unforeseen circumstance requires immediate action. The Board shall subsequently be informed of the reasons for and the results of each such inspection”.

In other words, the Agency will have the right to carry out “special inspections” if it believed any activity at a safeguarded Indian facility or any report raised questions. In the North Korean case, the board had approved the special inspections which the Pyongyang refused to allow. But India, in its accord with the IAEA, has consented to be subject to special inspections without the Board’s prior consent.

While the five established nuclear powers have offered only 11 facilities in total — less than 1% of their total facilities — for IAEA safeguards, India has agreed to place 35 of its facilities under IAEA inspection, according to the civil-military separation plan presented to Parliament by the Prime Minister in 2006.

These facilities include 14 power reactors; three heavy-water plants at Thal-Vaishet, Hazira and Tuticorin; six installations at the Nuclear Fuel Complex in Hyderabad; the PREFRE reprocessing plant at Tarapur; and nine research facilities, such as the Tata Institute of Fundamental Research, Board of Radiation and Isotope Technology and Saha Institute of Nuclear Physics. In addition, the Prime Minister has agreed to shut down by 2010 the Cirus research reactor, which is one of the two research reactors in India producing weapons-grade plutonium. Several of these are generic facilities: nuclear medicine, irradiation of food grains, nuclear energy, and also nuclear weapons.

A source of grave concern for India is the fact that the so-called “Corrective Measures” in the draft Agreement, in the event of disruption of fuel supplies, are dangerously vague and non-specific. For example, the safeguards accord’s Clause 29 reads: “The termination of safeguards on items subject to this Agreement shall be implemented taking into account the provisions of GOV/1621 (20 August 1973)”. Although the text of the GOV/1621 document is not public, its central stipulation is well-known — that facility-specific safeguards shall be “in perpetuity”, allowing for no suspension of international safeguards and shutting out room for corrective measures. Such are the known conditions of GOV/1621 that the rights and obligations of the parties continue perpetually on all nuclear materials until the materials have been returned or all the fissionable material supplied, produced or processed goes out of the inventory.

Under Clause 32 of the India-IAEA accord, New Delhi can withdraw a facility from safeguards with the prior consent of the IAEA but only after “the facility is no longer usable for any nuclear activity relevant from the point of view of safeguards,” which means the installation’s nuclear capability has been dismantled or permanently disabled to the Agency’s satisfaction.

Another cause of concern is that in case of disagreement or dispute, there is no arbitration. India can only represent its case to the Board (Clauses 104 to 106), whose decision has to be implemented by us. If India does not act on its directive, the Board will report India’s non-compliance to the UN General Assembly and Security Council. Past experience has shown that India has rarely received justice when India-related disputes have gone to the UNSC.

The Prime Minister had assured Parliament on August 17, 2006, that, “As a country with nuclear weapons, there is no question of India agreeing to a safeguards agreement or an Additional Protocol applicable to non-nuclear-weapons states of the NPT”. In contrast, the “Additional Protocol” will seek to ensure that specialized equipment, trained personnel, and designs and operating manuals are not transferred from the civilian programme to the military programme. The Hyde Act demands that the “Additional Protocol” for India be “based on a Model Additional Protocol as set forth in IAEA information circular (INFCIRC) 540” — that is, the Protocol applicable to non-nuclear-weapons states.

The following are not provided at all: (a) Assured, uninterrupted fuel supply; (b) strategic reserves of fuel. In 123 Agreement, the promises for uninterrupted fuel supplies are all prospective. In August 2006, the PM had told Parliament, for instance, that: “An important assurance is the commitment of support for India’s right to build up strategic reserves of nuclear fuel over the lifetime of India’s reactors”. The Draft with IAEA carries no reference to the continuation of India’s safeguards obligations being contingent on perpetual fuel supply. The agreement indeed explicitly blocks India from ever undertaking real correction in response to a fuel supply cut-off — the lifting of  IAEA safeguards.

In fact, what was provided even in the 123 Agreement has been given the go-by. Article 5 of the 123 Agreement specified, “In the light of the above understandings with the United States, an India-specific safeguards agreement will be negotiated between India and the IAEA providing for safeguards against withdrawal of safeguarded nuclear material from civilian use at any time as well as providing for corrective measures that India may take to ensure uninterrupted operation of its civilian nuclear reactors in the event of disruption of foreign fuel supplies.”

Clause 3 of the IAEA draft Agreement provides: “The purpose of safeguards under this Agreement is to guard against the withdrawal of safeguarded nuclear material from civilian use at any time” Notice that the words are exactly as provided in the 123 Agreement. But the words that follow in the 123 Agreement are conspicuously missing! Similarly, no reference in operative parts to strategic reserves. Quite rightly too: it is no job of IAEA to help us build stocks of fuel – yet Government spokesmen are saying that the Agreement provides for these!

Lastly, the BJP has been demanding from the Government, right since July 2005, to know the cost of separation of military and civilian facilities. The Government has not given a reply to this important question till date.

While the Government has all along said that the deal is exclusively about nuclear energy, the US Administration and America’s bipartisan political class has left no one in doubt that the deal is all about bringing India into the non-proliferation regime.

The leadership of the Congress party and the Government  is assisting the US in realizing its most important foreign policy objective vis-à-vis India in a manner that has undermined India’s strategic autonomy while promising illusory energy security.

Disrespect for Parliament

Dr Manmohan Singh kept every thing secretive about the Nuclear Deal. He did not discuss the contents of this deal either in Parliament nor with his cabinet colleagues. There was total lack of transperancy. The irony is that the political parties and governments of the countries represented on the Board of Governors of the IAEA have an opportunity to debate the contents of the draft safeguards agreement concerning India, but the people and the political parties in India are deprived of that opportunity.

Dr. Manmohan Singh addressed a press conference in Washington on 20 July 2005, two days after he and US President George Bush issued a joint statement about the Indo-US nuclear deal. One correspondent asked Dr. Manmohan Singh a pointed question: “Mr. Prime Minister, do you see any resistance coming forward from your allies and the opposition in putting the new India-U.S. policy to practice? And will you seek a parliamentary consensus or approval to the new direction you seem to be taking in foreign policy?”

This is how the PM replied. “Well, the Parliament in our country is sovereign,” he said. “It goes without saying that we can move forward only on the basis of a broad national consensus.” If Dr. Manmohan Singh truly believes that “Parliament in our country is sovereign”, why did he not seek a sense of the two Houses before rushing into the 123 Agreement and the safeguards agreement with the IAEA? Not even one all-partmeeting was conducted on this issue. There was a consistent demand for setting up a Joint Parliamentary Committee to study the 123 Agreement. Dr Singh did not accept the demand. Probably the Prime Minister must have thought that the MP s are incapable of giving considered opinion on the issue.

Accountability and transparency are the cornerstones of democratic system of governance. These have been casualties in the functioning of the UPA government. This is best illustrated by the manner in which the government has handled the issue of the Indo-US nuclear deal. Ideally in a democracy, any major international agreement that impinges on India’s national unity, territorial integrity and security must be ratified by Parliament.The Prime Minister has reduced an important agreement between two sovereign nations into a private agreement between two individuals — himself and President Bush. He has behaved as a junior partner in this partnership.

                         (Authour is BJP national Media Co-Convener based in New Delhi)

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