Notification U/s 90(1) Of Income Tax Act Is Mandatory To Enforce Double Tax Avoidance Agreements By Judicial Or Quasi-Judicial Bodies: Supreme Court

Emphasizing that the grant of automatic benefits based on other country's entry into OECD is 'unfeasible’, the Supreme Court has upheld the need for a notification under Section 90(1) of the Income Tax Act, 1961 for any court, authority, or tribunal to enforce a Double Tax Avoidance Agreement (DTAA) or any protocol altering its terms or conditions.

The Supreme Court held so, while considering a batch of appeals arising from decisions of the Delhi High Court, which involved the interpretation of the Most Favored Nation (MFN) clause contained in various Indian treaties with countries that were members of the Organization for Economic Cooperation and Development (OECD).

Broadly, the issues that arose were whether there was any right to invoke the MFN clause when the third country with which India had entered into a DTAA was not an OECD member at that time, and secondly, whether the MFN clause was to be given effect automatically or if it was to come into effect only after a notification was issued.

A Two Judge Bench of Justice S. Ravindra Bhat and Justice Dipankar Datta observed that “The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90”.

AOR Raj Bahadur Yadav appeared for the Petitioner, whereas Senior Advocate Percy Pardiwalla and AOR Rahul Jain appeared for the Respondent.

After considering the submission, the Bench noted that the treaty-making power vested exclusively with the Union, as per Article 253 of the Constitution, and the relevant entries in the Union List (List I, Seventh Schedule).

The Bench remarked that it was widely accepted that, regardless of how precise the treaty text may appear, the way in which it is applied by the parties is often a good indicator of their shared understanding, provided the practice is consistent and mutually accepted.

The Bench further noted that the issue of treaty interpretation and treaty integration into domestic law is driven by constitutional and political factors subjective to each signatory. Therefore, domestic courts cannot adopt the same approach to treaty interpretation in a black letter manner, as is required or expected of them, while construing enacted binding law.

Based on the mentioned observations, the Bench held that a notification under Section 90(1) of the Income Tax Act is a necessary and mandatory requirement for any court, authority, or tribunal to enforce a DTAA or any protocol altering its terms or conditions, especially when such changes impact existing provisions of the law.

At the same time, the Bench clarified that when a provision in a DTAA or a Protocol with one nation stipulates similar treatment for a matter already covered by its terms as it provides to another nation (a member of a multilateral organization like the OECD), it doesn't automatically lead to the integration of that term extending the same benefit to the earlier DTAA of the first nation that entered into an agreement with India. In such cases, the terms of the earlier DTAA need to be specifically amended through a separate notification under Section 90.

Finally, the Apex Court concluded that the interpretation of the expression ‘is’ has present significance. Therefore, for a party to claim the benefit of a ‘same treatment’ clause based on the entry of a DTAA between India and another state that is a member of the OECD, the relevant date is the entry into the treaty with India, and not a later date when, after entering into a DTAA with India, such a country becomes an OECD member, according to India's practice.

Cause Title: Assessing Officer Circle (International Taxation) v. M/s Nestle SA [Neutral Citation: 2023 INSC 928]

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