2023 (10) TMI 981 - SC - Income Tax

Supreme Court Rules on MFN Clause Timing in Indian Tax Treaties, Requires OECD Membership at DTAA Entry, Not Parity Request.

ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2 (2) (2) NEW DELHI Versus M/s NESTLE SA

The SC set aside the HC's interpretation of the MFN clause in Indian treaties with OECD countries. It held that invoking the MFN clause requires the third ... Enforceability of treaty - Necessary notification not issued by the Government for brining the treaty into force - Most Favoured Nation (MFN) - Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development (‘OECD’) - protocol for changing terms or conditions in treaty - lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services (hereafter ‘FTS’) - bilateral treaties in question are between India and Netherlands, France, and Switzerland, respectively - whether there is any right to invoke the MFN clause when the third country with which India has entered into ‘DTAA’ was not an OECD member yet (at the time of entering into such DTAA) - whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued? HELD THAT:- The legal position discernible from the previous discussion, therefore is that upon India entering into a treaty or protocol does not result in its automatic enforceability in courts and tribunals; the provisions of such treaties and protocols do not therefore, confer rights upon parties, till such time, as appropriate notifications are issued, in terms of Section 90(1). The interpretation of the term “is” - Expression “is” has a present signification and it derives meaning from the context. Given this interpretation, the conclusion is that when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity. Treaty practice of India, in relation to DTAAs and their Protocol, and practices of Netherlands, France and Switzerland - The status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts. However, in India, either the treaty concerned has to be legislatively embodied in law, through a separate statute, or get assimilated through a legislative device, i.e. notification in the gazette, based upon some enacted law (some instances are the Extradition Act, 1962 and the Income Tax Act, 1961). Absent this step, treaties and protocols are per se unenforceable. International perspectives and practices - There is no dispute that treaties constitute binding obligations upon their signatories. Yet, like all compacts, how the parties to any specific instrument view them, give effect to its provisions, and the manner of acceptance of such conventions or compacts are in the domain of bilateral relations and diplomacy. Much depends upon the relationship of the parties, the mutuality of their interests, and the extent of co-operation or accommodation they extend to each other. 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. The role of practice which is, as the previous discussion demonstrates, not bilateral or joint practice, but practice by one, accepted generally by the international community as operating in that particular sphere, which is relevant, and at times determinative. Treaty practice of Switzerland, Netherlands and France is dictated by conditions peculiar to their constitutional and legal regimes. Could it conceivably be argued that in the event of failure of the Swiss Confederation to secure the requisite majority in a referendum or approval by the Swiss Parliament, or in the absence of approval by both houses of the States General in Netherlands, a DTAA provision or trigger event could nevertheless be assimilated into executive decrees? The answer is obviously in the negative. Likewise, the treaty practice in India points to a consistent pattern of behaviour when the signatory to an existing DTAA, points to the event of a third state entering into OECD membership, and a resultant trigger event, the beneficial effect given to the later third-party state has to be notified in the earlier DTAA, as a consequential amendment, preceded by exchange of communication (and perhaps, negotiation) and acceptance of that position by India. The essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined. ORDER: (a) A notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law. (b) 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. (c) The interpretation of the expression “is” has present signification. Therefore, for a party to claim benefit of a “same treatment” clause, based on entry of DTAA between India and another state which is member of OECD, the relevant date is entering into treaty with India, and not a later date, when, after entering into DTAA with India, such country becomes an OECD member, in terms of India’s practice. Reasoning and findings in the impugned orders cannot survive; they are set aside. The revenue’s appeals, therefore, succeed and are allowed. There shall be no order on costs. Pending applications, including those seeking intervention for impleadment, are disposed of. Issues Involved:1. Interpretation of the Most Favoured Nation (MFN) clause in various Indian treaties with OECD countries.2. Right to invoke the MFN clause when the third country was not an OECD member at the time of entering into the DTAA.3. Whether the MFN clause is automatically effective or requires a notification.Summary:I. Interpretation of the MFN Clause:The present batch of appeals arose from decisions of the Delhi High Court involving the interpretation of the MFN clause in various Indian treaties with OECD countries. The MFN clause provides for the lowering of the rate of taxation at source on dividends, interest, royalties, or fees for technical services (FTS) or the restriction of the scope of royalty/FTS in the treaty, similar to concessions given to another OECD country subsequently. The bilateral treaties in question were between India and the Netherlands, France, and Switzerland. The issues were whether there was any right to invoke the MFN clause when the third country with which India has entered into a DTAA was not an OECD member yet (at the time of entering into such DTAA); and whether the MFN clause is to be given effect to automatically or only after a notification is issued.II. Right to Invoke the MFN Clause:The High Court had interpreted the term 'is' in the context of the MFN clause to mean that the third country should be an OECD member at the time the request for parity is made by the taxpayer. This interpretation was based on the understanding that 'is' describes a state of affairs that should exist when the request is made, not necessarily at the time the DTAA was executed. However, the Supreme Court clarified that the expression 'is' has a present signification and derives meaning from the context. Thus, for a party to claim the benefit of the MFN clause, the relevant date is when the third country entered into the treaty with India, and not a later date when the country became an OECD member.III. Requirement of Notification:The Supreme Court held that a notification under Section 90(1) of the Income Tax Act is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA or any protocol changing its terms or conditions. The mere fact that a stipulation in a DTAA or a protocol requires the same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is a member of OECD) is given better treatment, does not automatically lead to the integration of such terms extending the same benefit. The terms of the earlier DTAA require to be amended through a separate notification under Section 90.Conclusion:The Supreme Court set aside the reasoning and findings in the impugned orders, holding that the interpretation of the MFN clause requires a notification under Section 90(1) to be effective. The appeals by the revenue were allowed, and the requirement of notification was emphasized for the integration of treaty benefits.