Assessing Officer Circle (international Taxation) 2(2)(2) New Delhi v. M/S Nestle Sa

JUDGMENT S. RA VINDRA BHAT, J. Table of Contents* I. Facts ................................................................. ........................2 II. Arguments of parties .......................................... .....................6 A. Revenue’s contentions ........................................................6 *Ed. Note: Pagination as per the original Judgment. 1145 B. Contentions of the assessees/Respondents .....................12 III. Relevant statutory provisions ........................... .....................20 IV . Analysis ........................................................... .......................21 A. General ..............................................................................21 B. The interpretation of the term “is” .................................30 C. Treaty practice of India, in relation to DTAAs and their Protocol, and practices of Netherlands, France and Switzerland .......................................................................32 D. International perspectives and practices .......................47 E. Vienna Convention on Law of Treaties ..........................49 V . Conclusions ......................................................................................57 1. The present batch of appeals arise from decisions of the Delhi High Court involving interpretation of the Most Favoured Nation (MFN) clause contained in various Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development (herea fter ‘OECD’). This clause provides for lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services (hereafter ‘FTS’) as the case may be, or restriction of scope of royalty/FTS in th e treaty, similar to concession given to another OECD country subsequently. The bilateral treaties in question are between India and Netherlands, France, and Switzerland, respectively. Broadly, the issues arising are whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement (hereafter ‘DTAA’) was not an OECD member yet (at the time of entering into such D TAA); and secondly whether the MFN clause is to be given eff ect to automatically or if it is to only come into eff ect after a notifi cation is issued. I. Facts 2. One of the fi rst judgments 1 challenged, in this batch of appeals by special leave, relates to Steria India. Before the Authority for Advance Ruling (“AAR”), Steria contended that having regard to Clause 7 of the 1 By judgment dated 28.07.2016 passed by the Delhi High Cour t in W.P.(C) 4793/2014. ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] Protocol to the India-France DTAA the more restrictive defi nition of the expression ‘fees for technical services’ appearing in the India-UK DTAA, must be read as forming part of the India-France DTAA as well. The AAR, by the impugned order, disagreed with Steria. It rule d that the Protocol could not be treated as forming part of the DTAA itse lf. It further held that restrictions imposed by the Protocol were only to lim it the taxation at source for the specifi c items mentioned therein; the restriction was only on the rates. Further, the ‘make available’ clause foun d in the India-UK DTAA could not be read into the expression ‘fee for tech nical services’ occurring in the India-France DTAA unless there was a notifi cation under Section 90 of the Income Tax Act, 1961 issued by the Union Government to incorporate the more restrictive provisions of the India-UK DTAA into the India-France DTAA. In other words, Steria’s plea that Clause 7 of the Protocol did not require any separate notifi cation and could straightway be operationalised, was not accepted by the AAR. Upon challenge in a writ petition before the High Court, this was reversed; the court accepted Steria’s contention, and held that a Protocol is conside red as part of the treaty itself and does not have to be separately noti fi ed for the purposes of application of the MFN clause. Therefore, in Steria, the question for the interpretation of the MFN clause in the Protocol to the India-France DTAA, was whether a separate notifi cation by the Union was required for application of the MFN clause. The AAR had concluded that even though the conditions set out in the MFN clause were satisfi ed, the benefi t could not be availed unless there was a specifi c notifi cation by the Government of India eff ectuating the benefi t under the MFN clause, which the High Court reversed. 3. The next set of facts, relate to the India-Netherlands DTAA which was entered into on 21.01.1989, and notifi ed on 27.03.1989. This DTAA was amended by a subsequent notifi cation dated 30.08.1999. The respondent assessees (writ petitioners before the High Court 2 ) were Concentrix Services Netherlands BV, and Optum Global Solutions International BV, and their Indian counterparts (in which the former held 99.99% share respectively) which remitted dividends. In 2020, Concentrix India and Optum Indi a 2 Judgment dated 22.04.2021 passed by the Delhi High Court in W.P. (C) No.9051/2020 and connected matters. 1147 each applied under Section 197 of the Act in the prescribed form, seeking a certifi cate that authorized them to deduct withholding tax at a lower rate of 5% in consonance with the subject DTAA read with the Protocol. In both cases, certifi cates were issued on 16.09.2020 and 04.01.2021 respectively by which the stipulated withholding tax rate was shown as 10%. In both cases, the certifi cates were valid till 30.03.2021. The validity period of the certifi cates came to an end on 31.03.2021 in both cases. By communication dated 17.09.2020, Concentrix, through its accountants, sought permission of respondents to inspect the fi les as well as copies of order sheet(s) which concerned processing of its application preferred under Section 197 of the Act. It also sought reasons why the certifi cate did not grant the withholding rate at 5%. The respondent sought to justify its certifi cate on 01.10.2020, and applied seeking reasons from the appellant (hereafter “the revenue”). A similar request was made by Optum Netherlands; the revenue furnished reasons to justify the withholding tax rate which was pegged at 10 % by its communication dated 22.01.2021. Feeling aggrieved, both Concentrix Ne and Optum Ne approached the Delhi High Court, in proceedings under Article 226 of the Constitution. 4. In both cases, the assessees contended that regard being had to the phraseology of the DTAA and the subsequent Protocol, the relevant event relied upon – the provisions of the DTAA and the Protocol, obliged the revenue to extend the lower rate of 5%. It was urged that since India h ad entered into DTAAs with other countries which were members of OECD, the lower rate or the restricted scope in the DTAA executed between India and such a country automatically applied to the India-Netherlands DTAA. This was based on the provision made in the preface of the Protocol which inter alia stated that the Protocol “shall form part an integral part of the Convention” i.e., the subject DTAA. It was argued that application of provisions of the DTAA (which followed subsequen t to the India- Netherlands DTAA), contrary to the revenue’s stand, no fresh notifi cation was required. In support, reliance was placed upon the rulings in Court in Steria (India) Ltd. v. Commissioner of Income-Tax 3 , the judgment of the Karnataka High Court in Apollo Tyres Ltd. v. Commissioner of Income Tax, 3 [2016] 386 ITR 390 (Delhi) ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] International Taxation, 4 and of another judgment of the Delhi High Court in EPCOS Electronic Components S.A. v. Union of India 5 . 5. By the impugned judgment, the Delhi High Court, allowed the writ petitions, inter alia, reasoning that: “15. A bare perusal of Clause IV (2) shows that it incorporates the principle of parity between the subject DTAA and the Convention s/ DTAAs executed thereafter qua the rate of withholding tax or the scope of the Conventions in respect of items of income concerning dividends, interest, royalties, fees for technical services, or payments for use of equipment [in short “subject remittances”]. 16. However, the principle of parity kicks-in, only if the f ollowing conditions are fulfi lled: i. First, the third State with whom India enters into a Convention/ DTAA should be a member of the OECD. ii. Second, India should have, in its Convention/DTA A, executed with the third State, limited its rate of withholding tax, on subject remittances, at a rate lower or a scope more restricted, than the rate or scope provided in the subject Convention/DTAA. 17. Once the aforementioned conditions are fulfi lled, then, from the date on which the Convention/DTAA between India and a third State comes into force, the same rate of withholding tax or scope as provided in the Convention/DTAA executed between India and the third State would necessarily have to apply to the subject DTAA. 17.1. Therefore, the argument advanced on behalf of the revenue, that the benefi cial provisions contained in the Conventions/DTAAs, executed both prior to or after the coming into force of t he subject DTAA, i.e., 21.01.1989, could not be made applicable to the recipients of remittances covered under the subject DTAA even though the concerned third State was a member of the OECD is, to our minds , 4 [2018] 92 Taxmann.com 166 (Karnataka) 5 2019 SCC OnLine Del 9113 1149 completely misconceived and contrary to the plain terms of Clause IV (2) of the protocol appended to the subject DTAA. 17.2. Although it must be said in favour of the revenue, the construct of Clause IV (2) is such that in certain cases there could be a hiatus between the dates on which the Convention/DTAA is executed between India and the third State and the date when such third State becomes a member of OECD. The limit on the lower rate of tax or the scope more restricted contained in the Convention/DTAA executed between India and the third State can only apply when the third State fulfi ls the attribute of being a member of the OECD. 17.3. We must point out that a lot of emphases is laid on behalf of the revenue on the word “is” mentioned in the following part of Cl ause IV (2) in the context of the aforementioned third States wit h which India has entered into Conventions/DTAAs after the execution of the subject DTAA “... which is a member of the OECD...”. 17.4. In our view, the word “is” describes a state of aff airs that should exist not necessarily at the time when the subject DTAA was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholding tax certifi cate under Section 197 of the Act. The word ‘is’- is both autological and heterological. An autological word is one that expresses the property that it possesses. Opposite of that is a heterological2 word, i.e., it does not describe its elf. The examples of autological words are expressions such as “Eng lish”, “Noun”, or “Word”. Heterological words as indicated above are those which do not describe themselves or have the potential of developing into several forms or supporting multiple interpretations. An example of a heterological word is the word “long”. The word long does not describe itself because it is not a long word. 17.5. Therefore, bearing the aforesaid in mind, the best interpretative tool that can be employed to glean the intent of the Contracting States in framing Clause IV (2) of the protocol would be as to how the other contracting State [i.e., the Netherlands] has interpreted the provision.” The judgment then considered the executive decree i ssued by Netherlands, pursuant to the Protocol, as a method of interpretation of how ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] the event, i.e. entry of another country into OECD, which had a previ ous DTAA with India (or where a country which was in OECD and subsequently entered into DTAA with India) had to be dealt with. 6. The judgment in Concentrix was followed subsequently, in the case of Nestle SA v. Assessing Offi cer Circle (International Taxation) 6 which is also under challenge . In the revenue’s appeals 7 in Nestle what was considered by the Delhi High Court, were provisions of the India-Switzerland DTAA and its three protocols. The other judgments impugned before this c ourt have similar facts, and the decisions by the High Court have followed the position laid out in Steria and Concentrix. II. Arguments of parties A. Revenue’ s contentions 7. The revenue argues, through the Additional Solicito r General, Shri N. Venkatraman (hereafter “ASG”) that the impugned judgments are unsustainable. The revenue points out that under the I ndian Constitution, especially by operation of Articles 253 (read with Ent ries 13, 14 and 15 of List I of the Seventh Schedule) of the Constitution of India, Parliament has exclusive power to legislate in respect of any tr eaty or convention, entered into by India, with any other nation; such treaty can only be entered into in exercise of executive power of the Union. It was urged that without Parliamentary legislation, such treaties ar e unenforceable, having regard to the express terms of Article 253 8 which clothe Parliament alone with the power to make laws “ notwithstanding” other provisions in that chapter- which delineates and distributes legisla tive power between the Union and States. Counsel submitted that India foll ows the “dualist” practise, which means that international treaties and c onventions are not, upon their ratifi cation, automatically assimilated into municipal law (i.e. the national legal system) but would require enabling le gislation. This 6 W.P. (C) No. 3243 of 2021 decided on 04.06.2021 7 Petition for Special Leave to Appeal (C) No. 5360/2022 8 Article 253 “Legislation for giving eff ect to international agreements Notwithstanding anything in the foregoing provisions of this Chapter, P arliament has power to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body. “ 1151 is in contrast to those countries which are “monist”, wherein the treaty provisions are enforceable like municipal law, and are to be given equal weight by courts. 8. The ASG relied upon the decisions in Gramaphone Co. of India Ltd v. Birendra Bahadur Pandey & Ors. 9 and Union of India (UOI) & Ors. v. Azadi Bachao Andolan & Ors. 10 to urge that the position in India is entrenched that without enabling legislation, any convention or event fl owing from a convention, as in creation of rights and liabilities of third parties to conventions or treaties, do not operate on their own, an d needs an intervening action by the Union, giving eff ect to such obligation. 9. The ASG relied on Section 90 which requires the issuance of a notifi cation, to give eff ect to any treaty or convention. It is argued that in the absence of any law, mere entering into a treaty or convent ion or protocol cannot give rise to any right under the taxation laws having regard to the structure of Section 90. Therefore, in the present case, the trigger to the MFN clause can occur at a later point in time when Ind ia enters into a treaty or convention with other nations which happens to be a membe r of the OECD at the time it enters into treaty or convention with India and if the DTAA with such country provides for taxation at rate lower than or benefi t over and above conferred upon the parties of the existing DTAA between India and the other nation. However, it would still require issuance of a notifi cation to give eff ect to such consequence. The incident involved in the present case – i.e., the mere fact that India entered into DTAAs with Slovenia, Lithuania, and Columbia at certain points in time and that some of them gained membership of OECD, ipso facto could not lead to claims by the respondents assessees that similar or identical treatme nt had to be extended to them as tax residents of Netherlands, France, and Switzerland respectively. 10. The learned ASG pointed out to the treaty practice between India and each of the three countries (France, Netherlands and Switzerland). He also referred to the fact that after Slovenia had entered OECD (in 2010) a Protocol has been signed between India and France. This Protoc ol was 9 1984 [2] SCR 664 10 2003 (Supp 4) SCR 222 ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] notifi ed sometime in 2012. This, it was argued, is a clear pointer to the fact that entering into membership of OECD per se does not result in automatic grants of benefi ts to a country which had entered into DTAA with India because the later Protocol with France and the consequent notifi cation omitted to extend any benefi t on the basis that Slovenia had entered OECD membership in 2010. 11. The learned ASG likewise pointed out that the Protocol executed between India and Netherlands was notifi ed on 30.08.1999. The plain reading of that notifi cation shows that the Protocol itself was triggered by the benefi t granted to the United States - with which India entered into a DTAA in 1990; Germany with which India entered into a DTAA in 1996; Sweden with which India entered into a DTAA in 1997 and the U.K. with which India entered into a DTAA in 1993. The notifi cation issued on 30.08.1999 (notifying the Protocol between India and Netherlands), conferred benefi ts based upon the concessions given to diff erent countries, with eff ect from diff erent dates depending on the nature of the benefi ts, rate of tax withholding, defi nition etc.; this too, it is argued, showed that the triggering event itself (here, mere entering into DTAA with a country which was or became a member of the OECD) did not result in grant of any benefi t or advantage to Netherlands. It was after bilateral negotiations that the Protocol was entered into, and yet later a notifi cation under Section 90 was issued, bringing it into eff ect. 12. These practices were in consonance with the man date and requirements of Section 90. The learned ASG also submitted that without the benefi t of any notifi cation, any tax administrator, an Assessing Offi cer or revenue authority would fi nd it hard to verify the claim of any assessee. The learned ASG argued that the impugned order is erroneous in as much as it relied upon executive orders and decrees issued by the Swi ss, Dutch and French authorities; such executive decrees or orders could not possibly bind Indian Revenue Authorities and had in fact been issued unilatera lly. They were bound to be implemented by the concerned revenue authorities in Netherlands, Switzerland and France, which in fact was done. The judgment in Concentrix relied heavily upon such orders or decrees, and to the extent is unsustainable. 13. The learned ASG also highlighted that if the impugned judgment is left undisturbed the interpretation by it as well as the judgm ents which 1153 followed it, would preclude enquiry into whether any DTAA or international instrument was in fact assimilated in municipal law under Sec tion 90 or any like provision. 14. Learned counsel highlighted that in the case of Nestle in fact, a plain and straightforward review of the fi rst and se cond protocols (of the India- Switzerland DTAA) demonstrates that without n otifi cation in accordance with Indian law, they could not have applie d which was in fact, the occasion for the notifi cations dated 07.02.2001 and 27.02.2001 respectively. Counsel particularly highlighted the co ncerned provision, i.e. Section 90 (1) of the Act. 15. The learned ASG cited Ram Jethmalani v. Union of India 11 , referring to the General Rule on Interpretation of Vienn a Convention on Law of Treaties, 1961 (hereafter “VCLT”), stated that though India is not a party to the VCLT, the convention contains many principles of customary international law and the principle of interpretation in Article 31 provides a broad guideline as to what should be an appropriate manner of interpreting a treaty in the Indian context as well. This court also observed that the broad principle of interpretation, with respect to tre aties, and provisions therein, would be that ordinary meaning of words be given eff ect to, unless the context requires otherwise. That such treaties are drafted by diplomats, and not lawyers, also implies that care has to be take n to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase, or sentence redundant would lead to a mani festly absurd situation, particularly from a constitutional perspect ive. This principle of interpretation was applied by the Andhra Pradesh High Court i n the case of Sanofi Pasteur Holding SA v. Department of Revenue 12 . 16. It was argued thus, that a treaty should be interpreted ordinarily, and the ordinary meaning of the words be given eff e ct to apart from ensuring that the interpretation should not render any wor d, phrase, or sentence redundant. The grammatical and literal mean ing of the India- Netherlands MFN clause reveals that the benefi t of reduced rate mentioned therein would be available only in case of such subsequent Indian treaties 11 [2011] 339 ITR 107 (SC) 12 [2013] ITR 354 (AP HC) ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] wherein the other State is an OECD member as on the date of the treaty entering into force. Any other interpretation would render the words “then as from the date on which the relevant Indian Convention or Agreement enters into force” redundant or otiose, which is not permissible as p er the above cited decisions of this court. 17. Responding to the linguistic interpretation of “is” by the impugned judgments, it is urged that the assessees had cited Article 10 and other Articles of the DTAAs to advance a view that “is” signifi es the time when the provisions of treaty are to be applied. They hav e also relied on dynamic interpretation of Article 3(2) which allows taki ng into account the defi nition in domestic law when a particular term is not defi ned in the DTAA. The ASG urges that such arguments ignore the discussion which clearly states that the word “is” can have present, past, or future meaning depending on the context in which it is used. In fact, Ar ticle 3(2) of the DTAAs also gives prominence to the context, as it clearl y talks about meaning of a treaty term in accordance with domestic tax law at the time of applying the tax treaty unless the context otherwise req uires. Counsel contends that the MFN clause clearly demonstrates that the other country is required to be an OECD member as on the date of the signing of the treaty and not on any future date. Thus, when Slovenia, Lithuania, or Columbia entered into respective DTAAs with India, they had to have been members of OECD at that time, for Netherlands, France, and Switzerland t o claim parity of treatment. 18. It was lastly argued that the notifications, wh ich amended existing DTAAs in respect of the three countries, reveal two aspects: one, that they were issued because of benefi ts granted to countries, other than Netherlands, France and Switzerland; two, that such subsequent notifi cations were triggered by the lowering of rate, or treatment of certa in kinds of income (dividends, interest and royalties and fee for technical servi ces) and their defi nitions. These notifi cations were preceded by negotiations, communications and letters, exchanged between India and the other country. In many cases, the amending notifi cation granted one benefi t, while denying other benefi ts (granted to other, third countries, whose DTAAs conferred such benefi ts after Netherlands or France or Switzerland’s DTAAs were entered into). This clearly showed that such notifi cations were necessary, 1155 and that there could not be any automatic applicability of such benefi ts given to other OECD members. B. Contentions of the assessees/Respondents 19. Mr. Poros Kaka, Mr. P. Chidambaram, Mr. S. Ganesh and Mr. Percy Pardiwala, learned senior counsel; Mr. Lovkesh Sawh ney, and Mr. Mukesh Bhutani, learned counsel, appeared for the respondent assessees. It was submitted that when the DTAA and the Protocols – including the MFN clause contained in the concerned Article of the Protocol was already notifi ed under section 90(1) and it has come into force , there is further no legal requirement to notify any subsequent amendment t o the DTAA which becomes operative automatically as a consequence of the trigger of the MFN clause to the DTAA. Counsel urged that Sec tion 90 only requires notifi cation of a treaty or protocol, and does not mandate each clause of such agreement to be further notifi ed separately. A plain reading of Section 90 of the Act demonstrates that it does not require each article or paragraph thereof of an already notifi ed agreement to be further notifi ed separately if the amendment is as a consequence of a self-operative MFN clause. Undoubtedly if the amendment is as a consequence of a bilateral negotiation, then, a separate notifi cation is required. To ascertain if any such requirement exists or otherwise, one will have to refer to the respective clauses itself. It is urged that the sub ject MFN clause in the Protocol to India-Netherlands DTAA has no such require ment. 20. The contrast between India’s DTAAs with Netherl ands and Switzerland, is that the relevant MFN clause in the India-Switzerland DTAA originally required initiation of negotiation, to apply the benefi cial provision agreed with other OECD member. This was repealed by notifi cation No. SO 2903(E), dated 27-12-2011 and both India-Switzerland agreed on the present MFN clause which does not require negotiation to give the benefi t of reduced rate of tax, and it was argued applies automatically just like the India-Netherlands MFN. Counsel also highlighted that the MFN Clause in the Protocol to the India-Finland DTAA also clearly requires India to immediately inform the Finland authorities and noti fy such benefi cial provision whenever the MFN clause gets triggered. Counsel also referred the MFN clause in the Protocol to the India-Philippines DTAA, to say that ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] that too clearly requires the countries to inform each other and review the provisions with a view to extend the benefi cial provisions. 21. Learned counsel submitted that the diff erence in la nguage, is unimportant, because Article 7(3) of the India-Netherlands DTAA shows that treaty partners are same; yet the instrument uses diff erent language to denote the same terms. Article 7(3) specifi cally notes that where the expense limit is relaxed for computing the profits attributable t o the permanent establishment in any other convention, the competent authority of one state would notify such competent authority of the other state, and at the request of that competent authority which is notifi ed, the terms of the treaty shall be amended by Protocol to refl ect such benefi cial terms. Naturally, once that amendment is agreed pursuant to bilateral negotiations, it has to be notifi ed. This language, it is pointed out, is absent in the MFN clause. 22. There is no requirement in the subject MFN clause to issue any notifi cation to bring into force the benefi cial provisions from subsequent DTAAs or by way of a notifi ed protocol or negotiation. The MFN clause simply states that the reduced rate as extended to an OECD country “ shall also apply ” under this current convention and, hence, such cl ause is automatic in operation. The use of diff erent language in the DTAA by the two contracting states is indicative of their intent and cannot be d isregarded whilst interpreting their terms. Likewise, in the case of the India-Switzerland DTAA, the nature of the existing MFN clause is such that no negotiation is needed but for change in scope, for which requirement for negotiation has still been retained by the treaty partners. Obviously, these diff erences in the language of the clauses bear signifi cance. 23. This court was shown the observations of the Income Tax Appellate Tribunal (ITAT) Mumbai in SCA Hygiene Products AB v. DCIT 13 , and the ITAT Delhi decision in Mitsubishi Electric India Pvt Ltd v Commissioner of Income Tax 14 where the tribunal has noted the diff erence in triggers of the MFN clause such as one which is (a) automatic (India-Sweden) (b) requiring notifying authority of other state (India-Philippines) (c) requiring negotiation. It was urged that the tribunal adopted the same interpretation 13 ITA No. 7315/Mum/2018 14 ITA No. 3336/Del/2018 1157 as was done in the judgment impugned. It was submitted also, that the Karnataka High Court in Apollo Tyres Ltd. (supra) had similarly considered the same Protocol to the India-Netherlands DTAA; which as the rev enue did not challenge - had, attained fi nality. 24. The assessees refute the revenue’s argument that treaties with other OECD countries did not have a triggering consequence of the MFN clauses with the three countries in the present case. On the revenue’s reference to the unilateral notifi cation dated 30.08.1999, where the restricted scope of FTS is only given by India w.e.f. 01.04.1997, whereas the limited scope of FTS was agreed in the India-USA DTAA which came into force from 18.12.1990 - it is urged that this notifi cation is unilateral and not a bilateral amendment by both states. The assessees highlight, in this regard that the notifi cation nowhere clarifi es that both states had agreed to its contents. In contrast Notifi cation No. GSR 382(E)/ Notifi cation No.2/2013 dated 14.1.2013 which notifi ed the Protocol to India-Netherlands dated 10.5.2012 bilaterally amending the DTAA and states “India and Netherlands... Desiring to conclude a Protocol (hereinafter referred to as “Amending Protocol”) to amend the Convention....have agreed as follows” 25. It is submitted that every bilateral amendment to treaty always has a date of entry into force agreed by both states. But the said No tifi cation dated 30.08.1999 does not have one. Contrast this with the 2012 bilateral amendment made in the India-Netherlands DTAA by the Protocol whi ch entered into force on 02.11.2012 and was notifi ed vide Notifi cation No. 2/2013. 26. The purpose of this unilateral notifi cation by India is clear from the Dutch communication dated 18.11.1999 which states that messages were exchanged and there was a diff erence of understanding between Indian and Dutch authorities on the limited aspect as to whether the MFN clause would be applicable from the date of entry into force of the benefi cial DTAA, or w.e.f. 1 st April of the following fi scal year, since India follows the fi nancial year (April-March) pattern. This limited aspect was agree d by the Dutch authorities. It is argued that no such reservation was noted by India for MFN in clause IV of Protocol. ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] 27. Counsel submit that the absence of a unilateral notifi cation which may have in the past been issued as an administrative practice cannot override the clear language of an MFN clause which provides for automatic application. The assessees refer to Union of India of India v. Agricas LLP 15 , which held that the State cannot breach a treaty to which it is a party by referring to domestic law-be it legislative, execut ive, or judicial decision. The decision in Engineering Analysis Centre of Excellence P . Ltd. v. CIT 16 applied the principle in Director of Income Tax v New Skies Satellite BV17 wherein the Delhi High Court held that mere executi ve position cannot alter the law under the DTAA. 28. Learned senior counsel submit that Netherlands’ position has been clear as early as from 1998. The Dutch decree of 22.06.1998 issued by the Secretary of Finance clarifies that t he MFN clause in Clause IV of Protocol is automatic; for every favourable provision as a consequence of a DTAA with another OECD country, Netherlands was of the view that the amendment would apply with eff ect from date of entry into force of that relevant convention. Similarly, the decree by Netherlands on 28.02.2012 maintained that benefi cial provision of the USA-DTAA on restricted scope of FTS should apply with eff ect from 01-04-1991 (1st April of the fi scal year following the date of entry into force of the India-USA DTAA). 29. Counsel argue that the revenue’s arguments are unfounded because even in Netherlands, a notifi cation is required for MFN benefi ts to extend to the India-Netherlands DTAA. These decrees of 1998, 1999 and 2012 have been issued by executive-decree states in order to avoid ambiguity. Issuing such decrees are not akin to notifi cations statutorily required to give eff ect to automatic amendments but just represents the understanding of the Dutch authorities. Under Netherlands law to give eff ect to a DTAA, parliamentary approval under Article 91 of the Netherlands Constitution is required. The process is that it has to be signed by the government, after which it has to be approved by both houses of Parliament and then, ratifi ed. After such 15 [2020] 14 SCR 372 16 (2021) 432 ITR 471(SC) 17 (2016) 382 ITR 114 1159 approval and ratifi cation, nothing remains, and consequently, formal decrees follow. Similar arguments were advanced in respect of French orders and Swiss decrees and orders, which gave eff ect to the DTAAs and Protocols. It is highlighted that the entry of the three countries: Lithuania, Slovenia, and Colombia, into OECD were duly noted in subsequent orders and given eff ect to, wherever necessary. 30. Next, the assessees dealt with the argument tha t Lithuania, Columbia, etc. were not OECD members at the time of signing of the India- Netherlands DTAA, or the India-Switzerland Protocols in question, or the India-France DTAA and Protocol. The following chart is extracted, from the assessees’ submissions: Country DTAA signed DTAA Entry into force Date Notifi ed OECD Members Dividend Tax Art. 10 Slovenia 13.01.2003 (pg.512 of revenue’s Compilation- Vol. III, pdf pg.16) 17.02.2005 (pg.501 of revenue’s compilation- Vol. III), pdf pg.5) 31.05.2005 (pg.501 of revenue’s Compilation- Vol. III, pdf pg.5) 21.07.2010 5% Art 10(2)(a) has 10% benefi cial ownership requirement (pg.505 of revenue’s Compilation- Vol. III, pdf pg.9) Lithuania 26.07.2011 (pg.534 of revenue’s Compilation- Vol. III), pdf pg.38 10.07.2012 (pg.534 of revenue’s Compilation- Vol. III, pdf pg.38) 25.07.2012 (pg.534 of revenue’s Compilation- Vol. III, pdf pg.38) 05.07.2018 5% Art 10(2)(a) has 10% benefi cial ownership requirement (pg.538 of revenue’s compilation-Vol. III, pdf pg.42) Columbia 13.05.2011 (pg.90 Asses- see’s Common Comp.-Vol. VI, pdf pg.93) 07.07.2014 (pg.90 Asses- see’s Common Comp.-Vol. VI, pdf pg.93) 23.09.2014 (pg.90 Assessee’s Common Comp.-Vol. VI, pdf pg.93) 28.04.2020 5% Art 10(2) (pg.91 Assessee’s Com- mon Comp.-Vol. VI, pdf pg.94) 31. Learned counsel argued that the assessees are entitled to the benefi t of the lower tax rate of 5% provided for in the DTAAs between India and Lithuania, Slovenia, and Colombia respectively, by relying on the MFN clause in the treaty/protocol to the India-Netherlands, India-Swit zerland and India-France DTAAs in terms of which after the signing of the DTAA with these countries (and other protocols), if India entered into a DT AA ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] with an OECD member where India has agreed for a rate of tax on dividend lower than the rate provided for in each of the DTAAs with Netherla nds, Switzerland and France respectively, such lower rate also applies to those DTAAs. It is urged that the MFN clauses in the three DTAA s and their protocols clearly oblige Indian revenue offi cers to grant the benefi t that is given to countries which subsequently entered into DTAAs with India, and were given favourable benefi ts, upon their entry into OECD. 32. On the OECD membership issue, it was argued that the revenue’s only reason in the order denying the applicability of the lower rate of withholding tax at 5% - which was challenged by the a ssessee in the relevant impugned decision, was that the benefi t of the MFN clause cannot be given as Lithuania, Columbia, etc, were not OECD members at the time of signing of the India-Netherlands DTAA. OECD membership requirement for the third country at the time of signing of i ts own DTAA was not the reason given for rejection in the order impugn ed before the High Court. 33. Counsel submitted that the word “is” appearing in Article 10(1) of the India-Netherlands DTAA is in fact a complete answer to the revenue’s objection that Slovenia/Lithuania/Columbia ought to be members of OECD both at the time of signing of the India-Netherlands DTAA or at the t ime of execution of their own DTAA, and also at the time claim for lowe ring withholding by the assessee is made. Hence, the revenue is alluding that “is a member of OECD” appearing in the MFN clause means membership of OECD is a continuous requirement. Thus, if the argument, of the revenue that the phrase “is a member of OECD” is literally interpreted, it would mean Slovenia, Lithuania, and Columbia ought to be members of the OECD at the time of signing of India-Netherlands DTAA, at the time of execution of their own DTAA, and also the time when the assessee invokes the MFN clause is to be accepted; then, the consequence would be that while inte rpreting Article 10(1) of India-Netherlands DTAA which also uses the same word “is” (“is a resident”) the same meaning ought to be given. However , it is undisputed that while claiming the benefi t of Article 10, the assessee needs to be a resident of India/Netherlands only for the year in which the benefi t of Article 10 is sought by an assessee. Therefore, when for Article 10, “is” does not postulate continuous requirement of residence, the same word “is” when 1161 it appears in the MFN clause can only mean that Slovenia etc. need to be OECD members only when the benefi t of the MFN clause is invoked. 34. Learned senior counsel appearing for Nestle argued in addition, that the third Protocol, between India and the Swiss Confederation 18 , by Article 11(5) required that if India entered into agreement with another OECD country, providing for lower rate of taxation on dividends, interest and royalties at FTS, the same lower rate of taxation was to be gi ven to Swiss tax entities. 19 It relies on the fact that India and Lithuania-DTAA was signed on 26.07.2011; the date of its notifi cation was 25.07.2012. Lithuania became an OECD member on 05.07.2018. Likewise, the India-Colombia DTAA was signed on 13.05.2011 and notifi ed on 23.09.2014; Colombia entered OECD on 28.04.2020. These two DTAAs provided lower rates of taxation, as compared with the India-Switzerland DTAA. It was argued that the purpose of amending the relevant provisions of the DTAA, by the third Protocol was to automatically provide the same treatment to Switzerland; counsel relies on the expression that the lower rate given to the later OECD member by India “shall also apply between both Contracting States under this Agreement as from the date on which such Convention, Agreement or Protocol enters into force”. Counsel contrasts this with similar provisions in the third Protocol. The latter require the contracting states to enter into negotiations. Nestle underlines that the fi rst and second Protocol, were worded diff erently. Earlier, in respect of the same event, i.e. India’s entering into an agreement with another contracting state, granting lower rate of 18 Notifi ed by the Indian government on 13.08.2011 19 Article 5 of the third protocol which amended Articles 10, 11, 12 and 22 inter alia, read as follows: “in respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royal- ties and fees for technical services), if under any Convention, Agreement or Protocol between India and a third State which is a membe r of the OECD signed after the signature of this Amending Protocol, Ind ia limits its taxa- tion at source on dividends, interest, royalties or fees for technical services to a rate lower than the rate provided for in this Agr eement on the said items of income, the same rate as provided for in that C onvention, Agree- ment or Protocol on the said items of income shall also apply betwe en both Contracting States under this Agreement as from the date on which such Convention, Agreement or Protocol enters into force.” ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] tax, parties had to enter into negotiations (“ shall enter into negotiations without undue delay” ). It was emphasized that the object of changing the terminology in the third Protocol, was to assure to Swiss entities, that the treatment extended to entities of the other state, automaticall y aff orded a lower rate of taxation. 35. Learned senior counsel also referred to the opinions of Professor Dr. Robert J Dannon and Prof. Dr. Stef Van Weeghel on the history of treaty provisions and the applicable rules of interpretation, to su pport the assessees’ arguments. III. Relevant statutory provisions 36. Section 90 20 of the Income Tax Act reads as follows: “90. Agreement with foreign countries or specifi ed territories. 1 (1) The Central Government may enter into an agreement with the Government of any country outside India or specifi ed territory outside India— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specifi ed territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specifi ed territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specifi ed territory, as the case may be, or 20 Section 90 (1) was substituted with eff ect from 010.10.2009. The earlier provision was amended three times. Section 90 (2A) was inserted with eff ect from 01-04.2013 and amended with eff ect from 01-04-2016. It was later omitted by Act 17 of 2013. Section 90 (4) substituted, by Act 17 of 2013, the “a certifi cate, containing such particulars as may be prescribed, of his being a resident” (w.e.f. 1-4-2013) to the present provision. Section 90 (5) was inserted by w.e.f. 1-4-2013.Explanation 3 was inserted by Section 32 of Act 23 of 2012, s. 32 (w.e.f. 01-10-2009) and Explanation 4 was inserted by Act 7 of 2017, Section 39 (w.e.f. 1-4-2018). 1163 (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specifi ed territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and u nder the corresponding law in force in that country or specifi ed territory, as the case may be, and may, by notifi cation in the Offi cial Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specifi ed terri tory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double t axation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more benefi cial to that assessee. (2A) Notwithstanding anything contained in sub-sect ion (2), the provisions of Chapter X A of the Act shall apply to the assessee even if such provisions are not benefi cial to him. (3) Any term used but not defi ned in this Act or in the agreement referred to in sub-section (1) shall, unless the co ntext otherwise requires, and is not inconsistent with the provisio ns of this Act or the agreement, have the same meaning as assigned to it in the notifi cation issued by the Central Government in the Offi cial Gazette in this behalf. (4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless 4 a certifi cate of his being a resident in any country outside India or specifi ed territory outside India, as the case may be, is obtained by him from the Government of that country or specifi ed territory. (5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] Explanation 1 .- For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate hi gher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2 .—For the purposes of this section, “specifi ed territory” means any area outside India which may be notifi ed as such by the Central Government. Explanation 3 .—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defi ned under the said agreement or the Act, but is assigned a meaning to it in the notifi cation issued under sub-section (3) and the notifi cation issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have eff ect from the date on which the said agreement came into force. Explanation 4. —For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defi ned under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defi ned in the said agreement, but defi ned in the Act, it shall have the same meaning as assigned to it in the Act and explanatio n, if any, given to it by the Central Government.” 37. The relevant extracts of the DTAAs and the MFN clause contained within them, are extracted in Part IV.C below. IV . Analysis A. General 38. Treaty making power vests exclusively with the Union, per Article 253 of the Constitution, and the relative entries in the Union List (List I, VII th Schedule). Entering into a treaty is an attribute of sovereignty, and the power to do vests solely in the Union executive - as opposed to the states, or the shared (concurrent) domain within the distribution of administrative powers under the Constitution; thus, it can be traced to Article 73 of the Constitution. The structure and phraseology of Article 253 leaves one in no doubt, t hat 1165 it is when a treaty is enacted by law, or enabled through legislation, which assimilates it, that such provisions are enforceable in India. 39. Duncan B. Hollis 21 , in a paper describes that “The treaty lives a double life. By day, it is a creature of international law, which sets forth extensive substantive and procedural rules by which the treaty must operate [….] By night, however , the treaty leads a more domestic life. In its domestic incarnation, the treaty is a creature of national law, deriving its force from the constitutional order of the nation state that concluded it.” 40. In State of W.B. v. Jugal Kishore More 22 , this court held that the executive may make treaties with foreign States for the extra dition of criminals, but those treaties can only be carried into eff ect by Act of Parliament, for the executive has no power, without statutory authority, to seize an alien here and deliver him to a foreign power. Likewise, in State of Gujarat v. Vora Fiddali Badruddin Mithibarwala 23 this court observed that in India, unlike some other countries the stipulations of a treaty duly ratifi ed do not by virtue of such event (i.e. signing the treaty alone) have the force of law and Article 253 of the Constitution of India recognises this position. If a treaty either requires alteration of or addition to existing law, or aff ects the rights of the subjects, or are treaties on the basis of which obligations between the treaty-making state and its subjects have to be made enforceable in municipal courts, or which, involves raising or expending of money or conferring new powers on the government recognizable by the municipal courts, a legislation will be necessary. 41. In the judgment reported as V .O. Tractoroexport v. Tarapore & Co 24 this court underlined that “16. We may look at another well-recognised principle. In this country, as is the case in England, the treaty or International Protocol or 21 Duncan Hollis: Executive Federalism : Forging New Federalist Constraint s on the Treaty Power” Legal Studies Research Paper Series available at http : //ssrn.com/ abstract=895623 22 1969 (1) SCR 320 23 1964 (6) SCR 461 24 (1969) 3 SCC 562 ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] convention does not become eff ective or operative of its own force as in some of the continental countries unless domestic legislation has been introduced to attain a specifi ed result. Once, Parliament has legislated, the Court must fi rst look at the legislation and construe the language employed in it. If the terms of the legislative enactment do not suff er from any ambiguity or lack of clarity they must be given eff ect to even if they do not carry out the treaty obligations. But the treaty or the Protocol or the convention becomes important if the meaning of the expressions used by the Parliament is not cl ear and can be construed in more than one way. The reason is that if one of the meanings which can be properly ascribed is in consonance with the treaty obligations and the other meaning is not so consonant, the meaning which is consonant is to be preferred. Even where an Ac t had been passed to give eff ect to the convention which was scheduled to it, the words employed in the Act had to be interpreted in the well- established sense which they had in municipal law. (See Barras v. Aberdeen Steam Trawling & Fishing Co. Ltd. [(1933) AC 402])” 42. This court, in Maganbhai Ishwarbhai Patel & Ors. v. Union of India & Ors. 25 followed the ruling of the Privy Council in Attorney-General for Canada v. Attorney-General for Ontario & Ors. 26 (which had made some observations in the context of a rule applicable within the British Empire). This court’s ruling in Maganbhai Ishwarbhai (supra) is the most signifi cant, on this aspect. The relevant observations are as follows: “It will be essential to keep in mind the distinction between (1) the formation, and (2) the performance, of the obligations constituted by a treaty, using that word as comprising any agreem ent between two or more sovereign States. Within the British Emp ire there is a well-established rule that the making of a treaty is an executive act, while the performance of its obligations, if they entai l alteration of the existing domestic law, requires legislative action . Unlike some other countries, the stipulations of a treaty duly ratifi ed do not within the Empire, by virtue of the treaty alone, have the force of law. If the 25 1970 (3) SCR 53 26 [1937] A.C. 326 1167 national executive, the Government of the day, deci de to incur the obligations of a treaty which involve alteration of l aw they have to run the risk of obtaining the assent of Parliament to the necessary statute or statutes.... .Parliament, no doubt, ... .has a Co nstitutional control over the executive : but it cannot be disputed that the creation of the obligations undertaken in treaties and the assent to their form and quality are the function of the executive alone. Once they are created, while they bind the State as against the other contracting parties, Parliament may refuse to perform them and s o leave the State in default.” These observations are valid in the context of our Constitutional set up.” 43. The issue was more pointedly dealt with by the concurring judgment of J.C. Shah, J (who relied on Oppenheim’s International Law, 8th Edition): “...Such treaties as aff ect private rights and, generally, as required for their enforcement by English Courts a modifi cation of c ommon law or of a statute must receive parliamentary assent thr ough an enabling Act of Parliament. To that extent binding treaties which are part of International Law do not form part of the law of the land unless expressly made so by the Legislature. ********************************* The binding force of a treaty concerns in principle the contr acting States only, and not their subjects. As International Law is primarily a law between States only and exclusively, treaties can normally have eff ect upon States only. This Rule can, as has been pointed out by the Permanent Court of International Justice, be altered by the expr ess or implied terms of the treaty, in which case its provis ions become self-executory. Otherwise, if treaties contain provisions with regard to rights and duties of the subjects of the contracting States, their Courts, offi cials, and the like, these States must take steps as are necessary according to their Municipal Law, to make these provisions binding upon their subjects, Courts, offi cials, and the like.” ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] Shah, J also referred to Articles 73 and 253 and further commented: “80...By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with re spect to which the Parliament has power to make laws. Our Consti tution makes no provision making legislation a condition of the entr y into an international treaty in times either of war or peace. The executive power of the Union is vested in the President and is ex ercisable in accordance with the Constitution. The Executive is qua t he State competent to represent the State in all matters inter national and may by agreement, convention or treaties incur obligat ions which in international law are binding upon the State. But the obl igations arising under the agreement or treaties are not by th eir own force binding upon Indian nationals. The power to legislate i n respect of treaties lies with the Parliament under Entries 10 and 14 of List I of the Seventh Schedule. But making of law under that aut hority is necessary when the treaty or agreement operates to r estrict the rights of citizens or others or modifi es the laws of t he State. If the rights of the citizens or others which are justiciable are not aff ected, no legislative measure is needed to give eff ect to the agreement or treaty.” In Gramaphone Co. of India Ltd. v. Birendra Bahadur Pandey & Ors. 27 it was observed as follows: “The doctrine of incorporation also recognises the position that th e Rules of international law are incorporated into national law and considered to be part of the national law, unless they are in confl ict with Act of Parliament. Comity of Nations or no, Municipal Law must prevail in case of confl ict. National Courts cannot say yes if Parliament has said no to a principle of international law. National Courts will endorse international law but not if it confl icts with national law. National courts being organs of the National State and not organs of international law must perforce apply national law if international law confl icts with it.” 27 [1984] 2 SCR 664 1169 44. The holding in the decisions discussed above ma y thus be summarized: (i) The terms of a treaty ratifi ed by the Union do not ipso facto acquire enforceability; (ii) The Union has exclusive executive power to ent er into international treaties and conventions under Article 73 [read with corresponding Entries - Nos. 10, 13 and 14 of List I of the VIIth Schedule to the Constitution of India] and Parliament, holds the exclusive power to legislate upon such conventions or treaties. (iii) Parliament can refuse to perform or give eff ect to such treaties. In such event, though such treaties bind the Union, vis a vis the other contracting state(s), leaving the Union in default. (iv) The application of such treaties is binding upon the Union. Yet, they “are not by their own force binding upon Indian nationals”. (v) Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or aff ects the rights of citizens or others or modifi es the law of India. (vi) If citizens’ rights or others’ rights are not unaff ected, or the laws of India are not modifi ed, no legislative measure is necessary to give eff ect to treaties. (vii) In the event of any ambiguity in the provision or law, whic h brings into force the treaty or obligation, the court is entitled to look into the international instrument, to clear the ambiguity or seek clarity. 45. The clearest enunciation of law, on Section 90 can be found in Union of India (UOI) & Ors. v Azadi Bachao Andolan & Ors 28 . Apart from noticing the decisions of various High Courts (i.e. Commissioner of Income Tax v. Visakhapatnam Port Trust 29 , Commissioner of Income Tax v. Davy Ashmore India Ltd. 30 , Leonhardt Andra Und Partner, Gmbh v. Commissioner 28 2003 (Supp4) SCR 222 29 [1983]144ITR146(AP) 30 [1991]190 ITR 626 (Cal) ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] of Income Tax 31 , Commissioner of Income Tax v. R.M. Muthaiah 32 and Arabian Express Line Ltd. of United Kingdom & Ors. v. Union of India 33 ) this court held as follows: “The provisions of Sections 4 and 5 of the Act are expressly made “subject to the provisions of this Act”, which would include Section 90 of the Act. As to what would happen in the event of a confl ict between the provision of the Income Tax Act and a notifi cation issued Under Section 90, is no longer res integra. ************** *************** 26. A survey of the aforesaid cases makes it clear that the j udicial consensus in India has been that section 90 is specifi cally intended to enable and empower the Central Government to issue a notifi cation for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intenti on of the legislature to make a departure from the general pri nciple of chargeability to tax under section 4 and the general principle o f ascertainment of total income under section 5 of the Act, then the re was no purpose in making those sections “subject to the provisions” of the Act”. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notifi cation under section 90 towards implementation of the terms of the DT As which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. 27. The contention of the respondents, which weighed with the High Court viz. that the impugned circular No. 789 is incon sistent with the provisions of the Act, is a total non-sequitur. As we have pointed 31 [2001] 249 ITR 418 (Cal) 32 [1993]202 ITR 508 (KAR) 33 [1995] 212 ITR 31 (Guj) 1171 out, Circular No. 789 is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section (2) of section 90. In other words, the c ircular shall prevail even if inconsistent with the provisions of Income Tax Act, 1961 insofar as assessees covered by the provisions of the DTAC are concerned. ****************** **************** 29. In our view, the contention is wholly misconceived. Section 90 , as we have already noticed (including its precursor under the 192 2 Act), was brought on the statute book precisely to enable the executive to negotiate a DTAC and quickly implement it. Even accepting the contention of the respondents that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we are unable to see as to why a delegate of legislative power in all cases has no power to grant exemption. There are provisions galore in statutes made by Parliament and State legislatures wherein the power of conditional or unconditional exemption from the provisions of the statutes are expressly delegated to the executive. For example, even in fi scal legislation like the Central Excise Act and Sales Tax Act, there are provisions for exemption from the levy of tax. (See Section 5A of Central Excise Act, 1944 and Section 8(5) of the Central Sales Ta x Act, 1956). therefore we are unable to accept the contention that the delegate of a legislative power cannot exercise the power of exemption in a fi scal statute.” 46. The legal position discernible from the previou s 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 notifi cations are issued, in terms of Section 90(1). 47. The various DTAAs, their relative Protocols and the date(s) of their notifi cation under Section 90 of the Income Tax Act, based on the submissions of parties, and the materials placed on the record, are summarized in a tabular chart: ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] SUMMARIES OF DTAAs, PROTOCOLS & NOTIFICATIONS IN TABULAR FORMAT Contracting State #2 signing of/ entry into treaty date of entry into force Notifi cation, if any Date of signing relevant amending protocol Eff ective date of said amendment/ protocol Notifi cation if any Whether member of OECD Netherlands Treaty & Protocol - 13.07.1988 21.01.1989 27.03.1989 13.08.1999 34 01.04.1997 or 01.04.1991 or 01.04.1998 or 01.04.1995 (based on the provision, in relation to the concerned country) 30.08.1999 Yes (13 No- vember 1961) 10.05.2012 02.11.2012 14.01.2013 - giving eff ect from 02.11.2012 USA [earlier agree- ment dated 15.06.1989; also see instruc- tion dated 28.04.2003 and 23.10.2007] Treaty & Protocol: 12.09.1989 18.12.1990 20.12.1990 No amendment. [Note – USA does not have an MFN clause] NA NA Yes (12 No- vember 1961) UK [had an earlier agree- ment dated 30.06.1956; see also instruc- tion dated 19.03.2004] Treaty & Protocol: 25.01.1993 26.10.1993 11.02.1994 30.10.2012 27.12.2013 10.02.2014 - to be given retrospective eff ect from 27.12.2013 Yes (2 May 1961) Belgium 26.04.1993 (protocol) 01.10.1997 31.10.1997 01.04.1998 (for India) 19.01.2001 Yes (13 Sep- tember 1961) France Treaty & Protocol - 29.09.1992 01.08.1994 07.09.1994 01.04.1995 or 01.04.1997 (based on the provision) 10.07.2000 Yes (07 August 1961) 12.08.2009 12.08.2009 34 13/30.08.1999 (date of signing mentioned as 13.08.1999 in Protocol, but as 30.08.1988 in amending notifi cation dated 30.08.1999). 1173 Contracting State #2 signing of/ entry into treaty date of entry into force Notifi cation, if any Date of signing relevant amending protocol Eff ective date of said amendment/ protocol Notifi cation if any Whether member of OECD Switzerland Treaty and Protocol - 02.11.1994 19.10.1994/ 29.12.1994 01.01.1995 (Switzer- land) and 01.04.1995 (India) 21.04.1995 Protocol amending 1994 Treaty (2000) - 16.02.2000 In force from 20.12.2000 1 January 2001 (Swit- zerland); 1 April 2001 (India) 07.02.2001 Yes (28 Sep- tember 1961) Protocol amending 1994 Treaty (2010) - 30.08.2010 In force from 10.10.2011 1 January 2012 (Swit- zerland); 1 April 2012 (India) 27.12.2011 Germany [replaced old- er agreements notifi ed on 13.09.1960, 27.04.1979 and 02.03.1990] Treaty & Protocol: 19.06.1995 26.10.1996 29.11.1996 No amendment [Note – Ger- many does not have an MFN clause] NA NA Yes (27 Sep- tember 1961) Philippines Treaty & Protocol: 12.02.1996 21.03.1994 35 02.04.1996 02.02.2005 No Sweden 24.06.1997 25.12.1997 17.12.1997 Protocol amending the Convention and Protocol - signed on 17.02.2013 16.08.2013 14.08.2013 - to be given eff ect to from 16.08.2013 Yes (28 Sep- tember 1961) Portuguese Republic Treaty and Protocol: 11.09.1998 30.04.2000 16.01.2000 (correction by notifi ca- tions dated 25.08.2000 and 20.09.2005) 24.06.2017 08.08.2018 11.09.2018 - to have eff ect from 08.08.2018 (Art. 26 says 10.08.2018 in the footnote) Yes (4 August 1961) Slovenia 13.01.2003 17.02.2005 31.05.2005 Protocol amending the Convention and Protocol - signed on 17.05.2016 date of entry into force is 21.12.2016 Notifi ca- tion dated 27.10.2017 - to have eff ect from 01.03.2017 Yes (21 July 2010) 35 Unclear if there is perhaps a typographical error in th e Notifi cation produced before this court. ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] Contracting State #2 signing of/ entry into treaty date of entry into force Notifi cation, if any Date of signing relevant amending protocol Eff ective date of said amendment/ protocol Notifi cation if any Whether member of OECD Finland Treaty & Protocol: 15.01.2010 19.04.2010 20.05.2010 - with eff ect from 01.04.2011 - NA NA Yes (28 January 1969) Lithuania Treaty & Protocol: 26.07.2011 10.07.2012 25.07.2012: to have eff ect from 01.04.2013 - NA NA Yes (05 July 2018) Colombia Treaty & Protocol: 13.05.2011 07.07.2014 23.09.2014 - NA NA Yes (28 April 2020) C. The interpretation of the term “is” 48. The High Court had interpreted the term “is” occurring in t he DTAAs [see Clause IV(2) 36 of the India-Netherlands DTAA – the other two clauses in relation to France and Switzerland being sim ilar], which according to it “describes a state of aff airs that should exist not necessarily at the time when the subject DTAA was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholdin g tax certifi cate under Section 197 of the Act. The word ‘is’- is both autological and heterological. An autological word is one that expresses the property that it possesses. Opposite of that is a heterological word, i.e., it does not describe itself”. According to that interpretation of ‘is, when the request for parity is made by a party seeking aid of the DTAA and the Protocol containing a “same treatment” or in other words, a pull in clause, the court has to consider whether at that time the third party state is enjoying better benefi ts. Integral to this interpretation is whether the “is a member” means the present tense, which is that the third party state should be a member of OECD when it enters into DTAA with India. This is relevant, because the India-Lithuania 36 “If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, t hen as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.” [emphasis supplied] 1175 DTAA was signed on 26.07.2011; and notifi ed on 25.07.2012 37 . The date of membership of Lithuania into OECD was 05.07.2018. The India-Colombia DTAA was signed on 13.05.2011; its date of Notifi cation was 23.09.2014. Colombia was admitted to membership of OECD on 28.04.2020. Slovenia signed a DTAA with India on 13.01.2003; this was notifi ed on 31.05.2005, and Slovenia became a member of OECD on 21.07.2010. An amending Protocol was entered into, between India and Slovenia, on 16.05.2016, which was notifi ed on 27.10.2017. 49. Thus, in all three cases, the three “third party” nations: Lithuania, Colombia and Slovenia, were initially not members of OECD when t hey entered into treaties and protocols with India; they became members later. 50. In Jagir Kaur v. Jaswant Singh 38 Section 488 of the erstwhile Criminal Procedure Code read as follows: “Proceedings under this Section may be taken against any person in any district where he resides or is, or where he last res ided with his wife, or, as the case may be, the mother of the illegitimate child.” This court considered the meaning of “is” in the above provision: “The crucial words of the sub-Section are, “resides”, “is” and “where he last resided with his wife”. Under the Code of 1882 the Magistrate of the District where the husband or father , as the case may be, resided only had jurisdiction.” The court then emphasized that the term “is” was fact dependent, and had to be read contextually: “The purpose of the statute would be better served if the word “resides” was understood to include temporary residence. The juxtaposition of the words “is” and “last resided” in the sub-Section also thro ws light on the meaning of the word “resides”. The word “is”, as we shall explain later , confers jurisdiction on a Court on the basis of a casual visit and the expression “last resided”, about which also we 37 Notifi cation No. 28/2012 [F. No. 503/02/1997-FTD-1]/S.O. 1693(E), dated 25-7-2012 38 (1964) 2 SCR 73 ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] have something to say, indicates that the Legislature could not h ave intended to use the word “resides” in the technical sense of domicile. The word “resides” cannot be given a meaning diff erent from the word “resided” in the expression “last resided” and, therefore, the wider meaning fi ts in the setting in which the word “resides” appears.” In P. Anand Gajapati Raju v. P.V.G Raju 39 in the context of the Arbitration and Conciliation Act, 1996, this court explained that “is” normally has present signifi cation: “the phrase which is the subject of an arbitration agreement does not, in the context, necessarily require that the agreement must be already in existence before the action is brought in the Court. The phrase also connotes an arbitration agreement being brought into existence while the action is pending. Blacks Law Dictionary has defi ned the word is as follows: “This word, although normally referring to the present, often has a future meaning, but is not synonymous with shall have been. It ma y have, however , a past signifi cation, as in the sense of has been.” Again, in Vijay Kumar Prasad v. State of Bihar 40 this court reiterated the same view, that “is” refers to the present: “Although the expression normally refers to the present, often it has a future meaning. It may also have a past signifi cation as in the sense of “has been”. (See F .S. Gandhi v. CWT [(1990) 3 SCC 624 : 1990 SCC (Tax) 364 : AIR 1991 SC 1866] .) The true intention has to be contextually culled out.” 51. From the above discussion, it is clear that the expression “is” has a present signifi cation 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 trea ty benefi ciary to claim parity. 39 (2000) 4 SCC 539 40 (2004) 5 SCC 196 1177 D. Treaty practice of India, in relation to DTAAs and their Protocol, and practices of Netherlands, France and Switzerland 52. The DTAA which India entered into with the King dom of Netherlands, was signed on 13.07.1988. Article IV of the Protocol (of the same date), to the DTAA provided that “if after the signature of the aforesaid Convention under any Convention or Agreement between India and a third State which is a member of the Organisation for Economic Co-operation and Development, India, should limit its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income “then, as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention” 53. The DTAA between India and Germany entered into force on 26.10.1996; the DTAA between India and Sweden entered into force on 25.12.1997, the India-Swiss Confederation DTAA entered into force on 19.10.1994, and the DTAA between India and the United States of America entered into force on 18.12.1990. These states were members of the OECD. The Union limited the taxation at source on dividends, interest, roya lties, fees for technical services and payments for the use of equipment to a rate lower or a scope more restricted than that provided in the DTAA between India and the Netherlands on the said items of income. Consequently, the notifi cation dated 30.08.1999, provided the following benefi ts expressly on diff erent dates, having regard to the fact that India entered into DTAAs with OECD members and gave them eff ect, subsequently: “Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central G overnment hereby directs that the following modifi cations shall be made in the Convention notifi ed by the said notifi cation which ar e necessary for implementing the aforesaid Convention between Indi a and the Netherlands, namely: ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] I. With eff ect from April 1, 1997, for the existing paragraph 2 of article 10 relating to dividends the following paragraph shall be read : “2. However , such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the benefi cial owner of the dividends, the tax so charged shall not exceed 10 per cent. of the gross amount of the dividends.” II. With eff ect from April 1, 1997, for the existing par agraph 2 of article 11 relating to interest the following paragraph shall be read : “2. However , such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the benefi cial owner of the interest the tax so charged shall not exceed 10 per cent. of the gross amount of the interest.” III. With eff ect from the April 1, 1997, for the existi ng article 12 relating to royalty, fees for technical services and payment s for the use of equipment the following article shall be read : “Article 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Cont racting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State ; but if the benefi cial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-par agraph (a) of paragraph 4 and fees for technical services as defi ned in this article (other than services described in sub-paragra ph (b) of this paragraph): (i) during the fi rst fi ve taxable years for which this Convention has eff ect,-- 1179 (A) 15 per cent. of the gross amount of the royalties or fees for technical services as defi ned in this article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub- division or a public sector company ; and (B) 20 per cent, of the gross amount of the royalties or fees for technical services in all other cases ; and (ii) during the subsequent years, 15 per cent. of the gross amount of royalties or fees for technical services ; and (b) in the case of royalties referred to in sub-par agraph (b) of paragraph 4 and fees for technical services as defi ned in this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 4(b) of this article, 10 per cent. of the gross amount of the royalties or fees for technical services. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The term “royalties” as used in this article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientifi c work including motion picture fi lms and works on fi lm or video-tape for use in connection with television, any patent, trade mark, de sign or model, plan, secret formula or process, or for information concerning industrial, commercial or scientifi c experience ; and (b) payments of any kind received as consideration for the use of, or the right to use industrial, commercial or scientifi c equipment, other than payments derived by an enterprise described in paragraph 1 of articles 8 and 8A (shipping and air transport) from activities described in paragraph 2(a) of article 8 or paragraph 4(b) of article 8A. 5. For purposes of this article, “fees for technica l services” means payments of any kind to any person in conside ration for the rendering of any technical or consultancy servi ces (including through the provision of services of technical or o ther personnel) if such services : ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described i n paragraph 4 of this article is received ; or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design. 6. Notwithstanding paragraph 5, “fees for technical services” does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property oth er than a sale described in paragraph 4(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection wi th the operation of ships or aircraft in international traffi c; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or indi viduals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defi ned in article 14 (independent personal services) of this Convention. 7. The provisions of paragraphs 1 and 2 shall not a pply if the benefi cial owner of the royalties or fees for technical services, being a resident of one of the States, carries on business in the other State, in which the royalties or fees for technical services aris e, through a permanent establishment situated therein, or performs in that othe r State independent personal services from a fi xed base situated therein, and the royalties or fees for technical services are eff ectively connected with such permanent establishment or fi xed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 8. Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a poli tical sub- division, a local authority or a resident of that State. Where, however , 1181 the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, has in one of the St ates a permanent establishment or a fi xed base in connection with which the contract under which the royalties or fees for technical servi ces are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fi xed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fi xed base is situated. 9. Where, by reason of a special relationship between the payer and the benefi cial owner or between both of them and some other person, the amount of royalties or fees for technical services, having regard to the royalties or fees for technical services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the benefi cial owner in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable acc ording to the laws of each State, due regard being had to the other provisions of this Convention.” IV . With eff ect from April 1, 1995, for paragraph 6 of article 12 relating to royalties and fees for technical services referred to i n paragraph III above the following paragraph shall be read: “6. Notwithstanding paragraph 5, ‘fees for technical services’ does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection wi th the operation of ships or aircraft in international traffi c; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or i ndividuals, making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defi ned in article ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] 14 (independent personal services) of this Convention.” V . With eff ect from April 1, 1997, for paragraph 2 of article 12, relating to royalties and fees for technical services referred to i n paragraph III above the following paragraph shall be read : “2. However , such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the benefi cial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent. of the gross amount of the royalties or the fees for technical services.” VI. With eff ect from April 1, 1998, for paragraph 4 of article 12 relating to royalties and fees for technical services referred to i n paragraph III above the following paragraph shall be read : “4. The term “royalties” as used in this article means payme nts of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientifi c w ork including cinematograph fi lms, any patent, trade mark, design or model, plan, secret formula or process, for information concerning i ndustrial, commercial or scientifi c experience.” VII. The memorandum of understanding and the confi rm ation of understanding, dated September 12, 1989, with reference to paragraph 4 of article 12 of the Indo-USA Double Taxation Avoidance Convention (DTAC), will apply mutatis mutandis for the purpose of para graphs III, IV , V and VI above.” 54. It is therefore, clear that the date on which the relief of rate of taxation for interest and dividends was specifi ed to be 01.04.1997; diff erent dates (01.04.1995 and 01.04.1998) were applied as applicable to the defi nition of fees and technical services and other details; the rates, too varied, depending on the period(s). The second aspect, is that the notifi cation under Section 90 was issued on 30.08.1999. The third, and most signifi cant aspect is that the favourable or benefi cial treatment was gi ven to other OECD nations on 26.10.1996 (India-Germany); the DTAA between India and Sweden entered into force on 25.12.1997, the India-Swiss Confederation DTAA entered into force on 19.10.1994 itself. These earlier dates, did not 1183 result in India automatically extending benefi ts of Article IV of the India- Netherlands DTAA Protocol to Netherlands. The relevant phrase in t hat provision (Article IV) obliged India to grant to the Netherlands, the same benefi t to it, as was granted to the other nation in that third party state’s DTAA or Protocol with India: “as from the date on which the relevant Indian Conv ention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also. apply under this Convention” 55. Clearly, therefore, so far as India-Netherlands DTAA goes, there is established and clear precedent, of behaviour, in relation to treaty practise and interpretation. This was uncontested, and is a matter of record. 56. In relation to France, the India-France DTAA and Protocol came into force on 01.08.1994, after the notifi cation by the contracting states to each other of the completion of the procedures required under their laws to bring them into force. Article 7 of that DTAA (which dealt with principles of taxation of Business profi ts), provided by Article 7(3)(a) that: “Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restric tion on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention, Agreement or Protocol signed after 1-1-1990 betwee n that Contracting State and a third State which is a member of the OECD, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the te rms of the corresponding paragraph in the Convention, Agreement or Protocol with that third State immediately after the entry int o force of that Convention, Agreement or Protocol and, if the competent authority of the other Contracting State so requests, the provisio ns of that paragraph shall apply under this Convention from that entr y into force.” 57. The DTAA between India and USA had been entered into force, on 18.12.1990; the DTAA between India and Germany had been entered into on 26.10.1996. These DTAAs gave benefi ts or more favourable treatment ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] to USA and Germany, in respect of income on dividends, interest, royalties, defi nition of royalties and fees for technical services. In the light of these, India notifi ed changes in the applicable provisions to the India-France DTAA and Protocols through a notifi cation in July, 2000 41 . The recital to the said notifi cation of 2000 reads as follows: “And whereas in the Convention between India and Germany which entered into force on the 26th October , 1996, and the Convention between India and the United States of America which entered int o force on the 18th December, 1990, which States are members of the Organisation for Economic Co-operation and Developm ent, the Government of India has limited the taxation at source on dividends, interest, royalties, fees for technical services and paym ents for the use of equipment to a rate lower or a scope more restricted than that provided in the Convention between India and France on the said items of income.” 58. The amending notifi cation again followed the same pattern, as in the case of the India-Netherlands DTAA, of defi ning the rate and nature of relief on interest, and dividends and the rates applicable, and diff erent defi nition for diff erent dates for “fees on royalties and technical services”, i.e. 01.04.1995 and 01.04.1997 for Articles 11, 12, and 13. This notifi cation again reinforced India’s practise and conduct of giving eff ect of the subsequent event of a more benefi cial arrangement with a third country, to the country which had entered into a DTAA previously, on the basis of a treaty provision, through an express action i.e., a notifi cation under Section 90. Another aspect is that the India-UK DTAA and India-Portugal DTAA had a condition, i.e., that by Article 4, technical services (for the purpose of levying tax on income from fees for technical service) applied a condition that the taxpayer could “make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a t echnical plan or technical design” 59. Steria’s argument in addition, was that the India-Portugal DTAA was signed on 11.09.1998 (after 29.09.1992 when India-France DTAA was 41 Notifi cation No. S.O. 650(E), dated 10-7-2000 1185 signed). The Portuguese Republic is a member of OECD. Similarly, India - UK DTAA was signed on 25.01.1993 (after 29.09.1992) and the UK is a member of OECD. Hence, the scope of India-France DTAA is less restrictive than these two DTAAs (India-Portugal and India-UK). The provisions of the latter two DTAAs enabling such acts to get benefi ts, too should have applied. The revenue argues that for the more restrictive de fi nitions in the DTAAs in India-Portugal and India-UK treaties, to be automat ically imported into India-France DTAA there is need for a notifi cation, before its scope could be imported. It is pointed out that the Protocol, of 10.07.2000 did not extend the expanded defi nition, and instead confi ned the benefi ts to defi nition and treatment of income from dividends, interest, and royalties. The “make available” condition, in other DTAAs was consciously omitted from the notifi cation. 60. The omission of certain benefi ts (available to other member countries of OECD who had entered into DTAAs with I ndia) in the subsequent notifi cation, dated 10.07.2000, is another indication that a “trigger” event such as India granting favourable relief to a country per se does not cover all the benefi ts granted through the later instrument . Therefore, the benefi t which India granted France, was within the framework of its treaty originally negotiated. In the case of the other country (granted benefi ts later, through a convention, by India), a diff erent trajectory of negotiations might have led to diff erent kind of benefi ts to the third country (UK and Portugal, in the case of France). In other words, the structure of the main DTAA, and its phraseology, based on negotiations with the countries concerned, i.e., Netherlands, France and Switzerland, also plays a rol e in the kind of benefi ts that are assured through it. The structure and terms of other DTAAs might be diff erent; the coverage and defi nition of certain terms (FTS, permanent establishment, etc.) might be dissimilar. The r evenue’s argument that grant of automatic benefi ts based on the other country’s entry into OECD, as unfeasible, has merit. 61. As far as Switzerland is concerned the earlier discussion has noticed the three diff erent dates when DTAA and the two later Protocols were entered into. They were given eff ect to by three separate notifi cations (No. GSR 357(E), dated 21.04.1995; as amended by Notifi cation No. GSR 74(E), dated 07.02.2001 and Notifi cation No. S.O. 2903(E), dated 27.12.2011). ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] The second Protocol contained a condition, which constituted the “trigger” event. That provision is extracted below: “D With reference to Articles 10, 11 and 12 If after the signature of the Protocol of 16th February, 2000 under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Agreement on the said items of income, then, Switzerland and India shall enter into negotiations without undue delay in order to provide the same treatment to Switzerland as that provided to the third State.” 62. Nestle had argued that this provision has been deleted, and instead, another condition added, by the 2010 Protocol, which reads as follows: “ARTICLE 11 Paragraph 4 of the Protocol to the Agreement shall be deleted and replaced by the following paragraph: With reference to Articles 10, 11, 12 and 22 The provisions of Articles 10, 11, 12 and 22 shall not apply in respect to any dividend, interest, royalty, fees for technical services or other income paid under , or as part of a conduit arrangement. The term “conduit arrangement” means a transaction or series of transactions which is structured in such a way that a resident of a Contracting State entitled to the benefi ts of the Agreement receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received that item of income directly from the other Contracting State, would not be entitled under a Convention or Agreement for the avoidance of double taxation between the State in which that other person is resident and the Contracting State in which the income arises, or otherwise, to benefi ts with respect to that item of income which are equivalent to, or more favorable than, those available under this Agreement to a resident of a Contracting State; 1187 and the main purpose of such structuring is obtaining benefi ts under this Agreement. In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services), if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD signed after the signature of this Amending Prot ocol, India limits its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower than the rate provided for in this Agreement on the said items of income, the same rate as provided for in that Convention, Agreement or Protocol on the s aid items of income shall also apply between both Contracting States un der this Agreement as from the date on which such Convention, Agre ement or Protocol enters into force. If after the date of signature this Amending Protoco l, India under any Convention, Agreement or Protocol with a third Stat e which is a member of the OECD, restricts the scope in respect of royalties or fees for technical services than the scope for these items of income provided for in Article 12 of this Agreement, then Switz erland and India shall enter into negotiations without undue delay i n order to provide the same treatment to Switzerland as that provi ded to the third State.” It is urged that the change in terminology is signi ficant. The earlier Protocol had obliged parties to enter into negotiations to ensure that benefi ts extended to state parties which later entered into OECD membership, were given to Switzerland. However, the language of the third Protocol is more emphatic, in that it, states, through the second paragraph of the amended Protocol to Article 11, that in such event (of entry by third party state into OECD): “the same rate as provided for in that Convention, Agreem ent or Protocol on the said items of income shall also apply between both Contracting States under this Agreement as from the date on which such Convention, Agreement or Protocol enters into force .” 63. At this stage, it would also be useful to note that the second Protocol, by Article 16, had provided that: ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] “ARTICLE 16 The Governments of the Contracting States shall notify each other through diplomatic channels 1. that all legal requirements and procedures for giving eff ect to this Protocol have been satisfi ed. [..]” It could plausibly be argued that this condition is not substantive, but only diplomatic. However, what it requires is t hat the concerned governments have to notify how and when the Protocol is assimilated into the domestic legal system. Quite correctly the provision does not assign any time frame within which the Protocol has to be made eff ective. Therefore, inbuilt in the entire eco-system of the DTAAs is the inarticula te premise that assimilation into the domestic legal system is not always within the control of the executive wing which enters into the convention, or signs the protocol and that compelling constitutional and legal requirements have to be satisfi ed, before its benefi ts are integrated within the national legal regimes. This consideration, or premise, would equally apply in the case of the India-Switzerland DTAA and its amending Protocol; the requirement of notifi cation of the protocol and a separate amending Protocol, (like in the case of France and Netherlands) is necessary, by reason of Section 90 of the Act. Switzerland cannot claim an exception, based only on the language of the third Protocol. 64. It would be useful to end this discussion, with one more instance of India’s treaty practice, in regard to fulfi lling its obligations under DTAAs and their Protocols. India had entered into a DTAA with Canada on 30.10.1985 which was notifi ed on 25.09.1986 under Section 90. The DTAA contained provisions relating to rate of taxation, and treatment of royaltie s. It also contained a provision that in the event India entered into a subsequent DTAA with a member of the OECD, and conferred better terms, as compared with Canada, then the latter would be extended similar benefi ts. The India-Sweden DTAA was signed on 12.12.1988, which extended more favourable benefi ts, than what was given to Canada; Sweden was an OECD member when the DTAA was signed with India. This constituted the “trigger” event, impelling Canada to seek parity. The Protocol (of 1985) to the India-Canada DTAA contained the following stipulation: 1189 “With reference to paragraph 2 of article 13, in th e event that pursuant to an Agreement or a Convention concluded with a State which is a member of the Organisation for Economic Co-operation and Development after the date of signature of this Agreement, India would accept a rate lower than 30 per cent for the taxation of royalties or fees for technical services paid by a resident of India to a resident of that State, it is understood that such lower rate will automatically be applied for the taxation of royalties and fees for technical services paid by a resident of India to a resident of Canada where the royalties or fees for technical services are paid in respect of a right or property which is fi rst granted, or under a contract which is signed, after the date of entry into force of the fi rst-mentioned Agreement or convention.” 65. The amendment to the DTAA was on 24.06.1992, which was notifi ed under Section 90 on 28.10.1992; it reads inter alia, as follows: “Subsequent to the signing of the Agreement with Canada, India has entered into Agreements with other OECD countries, wherein the rate of taxation in respect of royalties and fees for technical services has been agreed at 20% of the gross amount. The revised Agreement with Sweden, which came into force on 12th December, 1988, is the fi rst of such Agreements. Accordingly, after consultation with the Canadian Government,”a notifi cation has been issued on 24th J une, 1992 notifying that the rate of tax of 20% will be applicable to r oyalties and fees for technical services paid by a resident of India to a resident of Canada. This reduced rate will be applicable to payments made in respect of the right or property which is fi rst granted or under a contract which is signed, after the 12th day of December , 1988. A copy of the notifi cation bearing GSR No. 635(E), dated 24th June, 1992, is enclosed. 3. The Canadian Government have also passed a Remission Order dated 3rd December , 1991, making the revised rate as above applicable to Indian residents as well in respect of royalties or fees for technical services paid by a Canadian resident.” 66. It is quite clear that the Protocol, to the origi nal DTAA was unambiguous and emphatic; it required that the trigger event would lead to ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] “such lower rate will automatically be applied for the taxation of royalties and fees for technical services paid by a resident of India to a r esident of Canada where the royalties or fees for technical services are paid in respect of a right or property”. In such an instance, of language, in the protocol, being as emphatic as the third Protocol to the India-Switzerland D TAA, the treaty practice of India was consistent; a separate notifi cation was later issued. 67. The respondents had relied on decrees/decisions of each of the countries, to underline that in terms of treaty practice of the three countries, the Union government has to extend reciprocity, which means that similarly, automatic benefi ts have to be given to taxpayers, claiming t hem under DTAAs and Protocols, on the occurrence of a third-party state gr anted better benefi ts, gaining admission/membership into OECD. The decree or decision of the Directorate General of Fiscal Aff airs, International Fiscal Aff airs (relevant authority in the Kingdom of Netherlands), relied upon by Concentrix and Optum Global 42 reads as follows: “In the treaty India agreed with Slovenia which entered into force on 17 February 2005 has entered a participation dividend rate of 5 percent. This is the case a participation dividend, if a company immediately provides at least 10 percent of the cap ital hold the body that pays the dividends. Slovenia joined. the OECD on 21 July 2010. Under the most-favored nation clause in the Protocol to the Convention, this event has the eff ect of retroactive eff ect to and As of July 21, 2010 a rate of 5 percent applies to participation dividend s, which are paid by a body that a resident of the Netherlands to a body that is a resident of India. The text of the relevant Treaty provision from the India -Slovenia Treaty is contained in the attachment. The most-favored-nation clause remains on portfolio dividends (if a body is less than 10 percent of the share capital of the company that pays the dividends) in the Netherlands-India relationship a rate of 10 percent applies. This rate is taken from the treaty between India 42 Decision of 28 February 2012, No. IFZ 2012/54M, Tax treaties: India, issued by the Director General, Fiscal Aff airs, Kingdom of Netherlands 1191 and Germany of June 19, 1995 and applies since April 1, 1997. Herein brings the treaty therefore no change between India and Slovenia.” The decree issued by the Swiss Federation 43 provides as follows: “Application of the most favoured nation clause of the protocol amending the agreement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on income Switzerland and India have concluded the agreement of 2 November 1994 for the avoidance of double taxation with respect to taxes on income (DTC IN-CH)1.1t was revised by the amending protocols dated 16 February 2000 and 30 August 2010. Article 11 of the amending protocol dated 30 August 2010 contains a so-called most favoured nation clause, which stipulates that if, af ter the signing of the amending protocol dated 30 August 2010, I ndia under any convention, agreement or protocol with a third State which is a member of the OECD, limits its taxation at source on dividends, interest, royalties or fees for technical services to a rat e lower than the rate provided for in OTC IN-CH on the said items of income, the same rate as provided for in that convention, agreement or protocol on the said items of income shall also apply between Switzerland and India as from the date on which such Convention, Agreement or Protocol enters into force. Following the signing of the amending protocol dated 30 Aug ust 2010, India concluded two new double taxation agreement s with States which are now OECD members, in which it granted lower rates with respect to dividends. These are the agreement of 26 July 2011 between the government of the Republic of India and the government of the Republic of Lithuania for the avoidance of double taxation with respect to income tax (DTC IN-L T) and the agreement of 13 May 2011 between the government of the Republic of India and the Republic of Colombia for the avoidance of double taxation with respect to income tax (DTC IN-CO). 43 The State Secretariat for International Financial Matters SIF Section Bilateral tax Issues and double taxation treaties, Swiss Federation, dated 13.08.2021 ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] Article 10, paragraph 2, letter a DTC IN-LT provides for a residual tax rate in the source State of 5% of the gross amount of divide nds if the benefi cial owner is a company (other than a partnership) that directly owns at least 10% of the capital of the company payin g the dividends. Lithuania joined the OECD on 5 July 2018. On the basis of the most favoured nation clause between Switzerland and India, lithuania’s accession to the OECO has th e effect of retroactively (from 5 July 2018) reducing the residual lax rate in the source State for dividends from qualifi ed participations from 10% to 5% applicable to the relationship between India and Switzerland. Article 10, paragraph 2 OTC IN-CO provides for a general residual tax rate of 5% in the source state. Colombia joined the OECD on 28 April 2020. On the basis of the most favoured nation clause between Switzerland and India, Colombia’s accession to the OECD has the eff ect of retroactively (from 28 April 2020) reducing the residual tax rate in the source Start: for dividends from 10% to 5% (dividends arising from qualifi ed interests and portfolio dividends) applicable to the relationship between India and Switzerland. Thus, under the provisions of DTC IN-CH, Indian tax residents receiving dividends from Swiss source as of 5 July 2018, or 28 April 2020 can claim, subject to the conditions laid down in DTC IN·CH, a refund of the (additional) withholding tax in accordance with the established procedures. The legal time limit set out in Arti cle 32 of the Federal Act on withholding tax applies..” 68. The decree issued by the Republic of France, inter alia, after narrating and reciting the India-France DTAA, the amending Protocols, the date on which India-Germany DTAA was entered into, and the date on which the Protocol, amending India-France DTAA on the basis of the Indo-German DTAA, provided as follows: “I. Withholding tax rate on dividends and interest under the most- favoured-nation clause 1193 A. Dividends referred to in Article 11 The rate of 15 % provided for in paragraph 2 of Article 11 of the Franco-Indian convention shall be replaced by that of 10% provided for in the tax treaty concluded by India with Germany. This rate shall be replaced by the rate of 5 % of the gross amount of dividends provided for in the tax treaty concluded between India and Slovenia if the ‘benefi cial owner is a company which directly holds at least 10 % of the capital of the company paying those dividends. B. Interest referred to in Article 2, Paragraph 12 (a) The rate of 10 per cent provided for in paragraph 2 {a) of Article 12 of the Franco-Indian Convention applies to interest paid on loans granted by insurance companies as a result of India’ s tax treaty with the United States. (b) The rate of 15 % provided for in paragraph 2 (b) of Artic le 12 shall be replaced by that of 10 % following the tax treaty conc luded by India with Germany.” 69. The context of these executive orders or decrees is to be understood in relation to each country’s manner of assimilation of treaties, in municipal or national law. The Federal Council headed by the President and the Federal Chancellor exercise the executive authority, in Switzerland. T he Federal Council has the authority to negotiate and sign treaties and convent ions. The treaty after its signature is ratifi ed in four diff erent ways: (a) In certain cases, Parliament authorizes the Federal Counci l in advance to sign the treaty and bring it into force as well; (b) Some treaties require prior approval of the Parliam ent to be enforceable; (c) In some cases, the treaty is subjected to optional re ferendum provided under Article 89 (3) of the Constitution; (d) In some cases, the international agreement needs sanction through compulsory referendum in terms of Article 89 (5) of the Constitution 44 . 44 Article 89 of the Federal Constitution of the Swiss Federat ion, available at: https:// www.constituteproject.org/constitution/Switzerland_2014.pdf?lang=en (accessed on 11.10.2023). ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] Consequential process then follows having regard to the nature of the treaty. 70. As far as France is concerned, the French Constitution of 1958, by Article 52 empowers the President to negotiate and ratify treaties. Treaty ratifi cation is authorized by the National Assembly and Senate when that treaty would aff ect the sovereignty of France or alter an existing statute, though such authorization has no normative value. A treaty aff ecting the rights of the citizens has to be published; after publication it prevails over French legislation. Article 55 confers upon treaties a status superior to that of domestic legislation and provides that concluded treaties do not require any implementing legislation to be enforceable. 45 71. The Kingdom of Netherland is party to a number of treat ies, international Agreements and Conventions. Such treaties have to receiv e approval of the Lower and Upper House of its Parliament (States General; Chapter III of the Constitution.). If a provision in a treaty is in confl ict with the Constitution, a two-thirds majority of the houses is mandatory (Article 91 paragraph 3 Constitution 46 ). The Netherlands government and its courts are not bound by a treaty until the States General have ratifi ed it. 72. In the opinion of this court, the status of treaties and conventions and the manner of their assimilation is radically diff erent from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratifi cation. Importantly, in Switzerland, some treaties have to be ratifi ed or approved thr ough a referendum. These mean that after intercession of the Parlia mentary 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. notifi cation in the gazette, 45 Title VI and Art. 56 of the French Constitution, 1958, available at: https:// www.constituteproject.org/constitution/France_2008.pdf?lang=en (accessed on 15.10.2023). 46 Article 91 of the Constitution of the Kingdom of Netherla nds, 2018, available at: https://www.government.nl/binaries/government/docum enten/reports/2019/02/28/ the-constitution-of-the-kingdom-of-the-netherlands/ WEB_119406_Grondwet_ Koninkrijk_ENG.pdf (accessed on 15.10.2023). 1195 based upon some enacted law (some instances are the Extradition Act, 1962 and the Income Tax Act, 1961). Absent this step, tre aties and protocols are per se unenforceable. E. International perspectives and practices 73. Klaus Vogel 47 (an acknowledged authority on double taxation), in the Treatise Double Taxation Conventions, comments - pertinently states, on the aspect of assimilation of international treaties into municipal (national) laws, that: “45.For purposes of international law, a tax treaty comes into existence upon the declaration of consent by both Contracting States (Article 9(1) VCLT). Ordinarily, the Head of State is author ized to make the declaration. In Germany, the declaration under Article 59 Abs. 1 GG is made by the Federal President. In the US, under Article II, section 2, clause 2 of the Constitution, the President, as Head of State, declares the consent of the United States to be bound by t he treaty under international law. This power is ordinarily delegated to the Secretary of State or a US Ambassador. 46. The method by which the Contracting States declare their consent is left to the Contracting Parties (Article 11 et seq. VCLT). For important treaties, however, it is generally ag reed that the conclusion of the treaty shall be given eff ect only through an exchange of instruments, or ‘ratifi cation’ (Article 14(1) VCLT); for multilateral treaties, it is by deposit of inst ruments at a location agreed upon in the treaty through corresponding not ifi cation (Articles 14(1), 16 VCLT). Ratifi cation is to be distingu ished from parliamentary consent (see above), which frequently, p rimarily in the language of the media, is incorrectly termed as ‘ratifi cation’. Article 31 of the OECD MC, Article 30 of the UN MC and Article 29 of the US MC each provide for ratifi cation of ta x treaties and treaties normally follow the MC in this respect. In the document of ratifi cation, the authorized agent - the Preside nt in the US, the Federal President in Germany, Austria and Switzerland – delivers the 47 Klaus Vogel on Double Taxation Conventions ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] formal declaration that the constitutional requirements necessary for internal application of the treaty have been fulfi lled (see infra Article 31 at m.no. 11 et seq.). *************** ************* 47. Upon declaration of intent to contract, whether through ratifi cation or other means, the treaty becomes binding under international law (unless the treaty provides for a diff erent date for entry into force). The binding force of the treaty under international law is to be distinguished from its internal applicability. Internal applicability is a consequence only of treaties which - like tax treaties - are designed t o be applied by domestic authorities in addition to obligating the States themselves (i.e., self-executing treaties). 48 *************** *************** 49. In the UK, where parliamentary consent is not necessary for conclusion of a treaty, the treaty becomes applicable internally only when a special law to this eff ect is passed by Parliament a fter the treaty enters into force under international law. 49 In special, legally authorized cases, such as for DTCs under § 788 ICTA 1988, the Queen may enact an Order in Council in place of parliamentary legislation. 50 A special law is also required in Canada 51 and other members of the Commonwealth. Under Netherlands constitutional law, the treaty becomes applicable domestically at the time it enters into force , 52 refl ecting the ‘monist’ theory of international law. In general, the confl ict between ‘monistic’ and ‘dualist’ theories has been overcome by a compromise view. 53 48 GATT has been held by the German Bundesfi nanzhof not to b e ‘self-executing’: 25 February, 1959, BStBl. III 166, 167 (1959); 15 October 1959, BStBl. III 486, 489 (1959). Direct internal applicability of GATT, however, has b een advocated by Jackson, 66 Mich. L. Rev. 250 (1967). 49 McNair, A.D., The Law of Treaties (1961) at 81; Oliver, J.D.B., 15 BTR 388 (1970). 50 See Baker, P., Double Taxation Conventions and International Tax Law (1994) at 46. 51 Ward, D.A., Ward’ s Tax Treaties (1993/94), at 6. 52 Van Raad, K., 47 MBB 49 (1978). 53 See in general: Tunkin, G & Wolfrum, R. (eds.), International Law and Municipal Law (1988). 1197 50. The process pursuant to which a treaty acquires the force and eff ect of domestic law was for long referred to by German theorists as a ‘transformation’ (i.e., as the promulgation of a domestic statute parallel to the treaty and incorporating the treaty text). A similar view can also be found, though often not very explicit, in other countries. 54 This theory, however cannot explain why, among other things, the treaty, even after parliamentary co nsent, becomes applicable domestically only when it enters into fo rce under international law or why it loses its binding force inter nally when it is rescinded or terminated at the international level . For these reasons, the German doctrine of international law abandoned the transformation theory. Parliamentary consent is now understood as a mandate through which the treaty itself - rather than a corresponding internal legislative provision - becomes applicable within the scope of domestic law. 55 51. The point in time at which a treaty enters into force internationally and the point at which it becomes applicable under domestic law must be distinguished from the point in time at which the material consequences of the treaty begin to take eff ect, or , in other words, the taxable period or the date from which taxation shall be limited by the treaty (the eff ective date). Usually this ‘initiation of treaty eff ects’ is established by explicit treaty rules. Various aspec ts may be of importance here. Treaty rules in particular often distinguish between treaty eff ects on assessed taxes and those on withholding taxes. In general, the material eff ects of tax treaties apply retrospectively, viewed from the date of entry into force under international law; detrimental retrospectivity, however, may be prohibited. 54 See, e.g., Canadian Supreme Court of 28 September 1982, The Queen v. Melford Development Inc., D.T.C. 6281 (1982), at 6285. 55 Regarding the domestic applicability of internat ional agreements in Germany, see Partsch, J., Die Anwendung des V olkerrechts im innerstaatlichen Recht. Uberprufung der Transformationslehre (6 Berichte der Deutschen Gesellschaft fur V olkerrecht (1964)); Blechmann, A., Begriff und Kriterien der innerstaatlichen Anwendbarkeit volkerrechtlicher V ertage (1970); id., Grundgesetz und V olkerrecht, 277 (1975); Langbein, V., Intertax 151 (1985), original German version: Langbein, V.,30 RIW 531 (1984). ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] 52. Through the mandate of the legislature, treaties in most States obtain the same authority as internal law. In some States they are even considered to have priority over domestic law. 56 ” F . Vienna Convention on Law of Treaties 74. Article 31 of the VCLT 57 refl ects the general rules of treaty interpretation. India is not a signatory to the convention. However, t he convention has been accepted by consensus as refl ecting the customa ry international law on general rules of treaty interpretation, and is thus still relevant in the Indian context. Article 31(3) of the VCLT provides that the following shall be taken into account, while interpreting the provisions of a treaty: (a) any subsequent agreement between the parties re garding the interpretation of the treaty or the application of its provisions; 56 For e.g., Art. 94 of the Dutch Constitution, Art. 55 of the French Constitution and for Luxembourg see Cour de Cassation of 14 July 1954, Pagani, 16 Pas. 150 57 “Article 31 General Rule of Interpretation 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their c ontext and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall com- prise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made b etween all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the oth er parties as an instru- ment related to the treaty.” 3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpreta- tion of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establish- es the agreement of the parties regarding the interpreta tion of the treaty or the application of its provisions; (c) any relevant rules of international law applicable i n the relations be- tween the parties.” 1199 (b) any subsequent practice in the application of t he treaty which establishes the agreement of the parties regarding the interpretation of the treaty or the application of its provision s; (c) any relevant rules of international law applicable in the relations between the parties. 75. In 2018, the International Law Commission (ILC) adopted its Draft Conclusions on Subsequent Agreements and Subsequent Practice in relation to the Interpretation of Treaties (“ILC Draft Conclusions”). 58 The ILC Draft Conclusions note that under the scheme of the VCLT, subsequent agreements and subsequent practice, being objective evidence of the understanding of the parties as to the meaning of the treaty, are a uthentic means of interpretation of treaties. 59 76. The ILC Draft Conclusions defi ne ‘subsequent agreement’ as an agreement between parties, reached after the conclusion of a treaty, regarding the interpretation of a treaty and its provisions. 60 A ‘subsequent practice’ is defi ned as consisting of conduct in the application of a treaty, after its conclusion, which establishes the agreement of the parties regarding the interpretation of the treaty. 61 Such subsequent practice under Articles 31 and 32 may consist of any conduct of a party in the application of a treaty, whether in the exercise of its executive, legislative, judicial or other functions, 62 and may take several forms. 63 ‘Practice’ includes any type of positive action, whether physical or conduct —for instance, the reliance on the provisions of a treaty to support a State’s chosen course of ac tion, or the adoption of legislation, or enforcement action based on a treaty, and abstention from action (omission) in the application of a treaty. Put simply, practice covers ‘what states do in their relations with one another’. 64 In a more dynamic sense, it represents the process of continuous interac tion 58 ILC Draft Conclusions on Subsequent Agreements and Subsequent Practice in relation to the Interpretation of Treaties, available at https://le gal.un.org/ilc/texts/instruments/ english/draft_articles/1_11_2018.pdf. 59 Conclusion 3, Id. 60 Conclusion 4(1), Id. 61 Conclusion 4(2), Id. 62 Conclusion 5(1), Id. 63 Conclusion 6(2), Id. 64 JL Brierly, The Law of Nations, 6th Ed. (Oxford University Press, 1963), 59. ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] between States. It also covers subsequent treaties with thi rd States 65 , and patterns of treaties, for instance when considering whether the conclusion of a large number of Bilateral Investment Treaties (BITs) could collectively amount to subsequent practice. 66 77. The International Court of Justice (ICJ) has ac cepted a wide variety of activities as interpretive conduct by st ates. It has referred to domestic legislation 67 , diplomatic correspondence 68 , and the silence or inactivity of one state in the face of the conduct of another. For example, in the Rights of Nationals Case, the ICJ took into account the practice of local customs offi cials. 69 In the Asylum Case 70 , Colombian failure to raise the Havana Convention in diplomatic correspon dence was used to show that Colombia did not construe the conventi on as applicable. In the Corfu Channel Case 71 , Albanian failure to challenge the court’s power to fi x the amount of compensation was used in interpreting the Special Agreement as not precluding the court from fi xing the quantum of damages. 65 Irina Buga, ‘Subsequent Practice as a Means of Treaty Interp retation’ in Modifi cation of Treaties by Subsequent Practice (Oxford University Press, 2018). See also Report of the International Law Commission covering its 2nd session, UN Doc A/1316 (1950) II YBILC 364, 368; M. Akehurst, ʻCustom as a Source of International Lawʼ (1974-75) 47 BYBIL 1, 43; ME Villiger, Customary International Law and Treaties: A Study of Their Interactions and Interrelations, with Special Consider ation of the 1969 Vienna Convention on the Law of Treaties (Brill, 1985), para 19. 66 See eg., SM Schwebel, ʻThe Infl uence of Bilateral Invest ment Treaties on Customary International Lawʼ (2004) 98 ASIL Proc 27; JE Alva rez, ʻA BIT on Customʼ (2009) 42 NYU J Intl L & Pol 17. 67 See Anglo-Iranian Oil Co. Case (U.K. v. Iran), 1952 I.C.J. 93, 106-07 (Iranian law used in interpreting the Iranian declaration acceding to the jurisdiction of the court). 68 See South West Africa Cases (Ethiopia v. S. Afr.; Liberia v. S. Afr.), 1966 I.C.J. 6, 134; Legal Consequences for States of the Continued Presence of South Africa in Namibia, 1971 I.C.J. 16, 39, where, in both cases, statements by South African diplomats were used in interpreting the League of Nations Mandates. See also Case Concerning Rights of Nationals of the United States of America in Morocc o (Fr. v. U.S.), 1952 I.C.J. 176, 211, where letters and minutes of meetings of custo ms offi cials were used in interpreting the treaty in question. 69 Case Concerning Rights of Nationals of the United States of America in Morocco (Fr. v. U.S.), 1952 I.C.J. 176, 211 70 Asylum Case (Colombia. v. Peru), 1950 I.C.J. 266, 286. 71 Corfu Channel (U.K. v. Alb.), 1949 I.C.J. 4, 25. 1201 78. The ILC Draft Conclusions further provide that a common understanding would be required, regarding the interpretation of a tre aty which the parties are aware of and accept. Such an agreement ma y, but need not, be legally binding for it to be taken into account. 72 Further, the number of parties that must actively engage in subsequent practice in order to establish an agreement under Article 31(3)(b), may vary. Silence on the part of one or more parties may constitute acceptance of the s ubsequent practice when the circumstances call for some reaction. 73 Agreement between the parties in respect of subsequent conduct or practice may be established by acquiescence of parties not actively participating in the practice, or the absence of objections (characterized as ‘passive conduct’). 74 79. ILC commentaries, such as the ILC Draft Conclus ions on subsequent practice, are an infl uential subsidiary means for determining rules of law, within the meaning of the term in Article 38(1)(d) of the ICJ Statute. This is because these documents often record and as sess state practice (as well as international jurisprudence and doctrine) , and often explain whether (and to what extent) opinio juris exists. 75 As of 2019, the ICJ had relied expressly on the ILC’s work in 22 cases (19 decisions in contentious proceedings and 3 advisory opinions). 76 80. The provisions of the ILC Draft Conclusions on subsequent practice were drafted and adopted by consolidating the writings of eminent publicists in international law, pursuant to extensive research on evolving state practice. 77 The cumulative eff ect of these provisions is that state practice subsequent to the adoption of a treaty confi rms and solidifi es the intent of the parties to the 72 Conclusion 10(1), Id. 73 Conclusion 10(2), Id. 74 ILC, Third Report on the Law of Treaties, UN Doc A/CN.4/167, 59 para 24; See also ME Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties (Brill, 2009), 431. 75 Danae Azaria, The International Law Commission’s Return to the Law of Sources of International Law, 13 FIU L. Rev. 989 (2019). 76 Id. 77 See for eg., ILC, Reports on Subsequent Agreements and Subsequent Practice in Relation to Treaty Interpretation, by Georg Nolte, Special Rapporteur, UN Doc A/CN.4/660 (2013); UN Doc A/CN.4/671 (2014); UN Doc A/CN.4/683 (2015), UN Doc A/CN.4/694 (2016), UN Doc A/CN.4/715 (2018). ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] treaty. The goal of treaty interpretation under the VCLT is to determine the meaning of the treaty viewed from the perspective of the contemporary shared understanding of the parties to the treaties. 78 As James Crawford has pointed out, from the perspective of international law, ‘the parties…own the treaty’ 79 . Bruno Simma further emphasizes the relevance of subsequent practice for the understanding of a treaty, noting that subseque nt practice denotes the decisive consent of the parties, and acts as a cogent, peremptory means of treaty interpretation. 80 81. It is widely accepted that however precise the treaty text appears to be, the way in which it is actually applied by the parties is usually a good indication of what they understand it to mean, provided the practice is consistent, and is common to, or accepted by, all the parties. 81 A relevant case in point is the interpretation of Article 5 of the Chicago Convention, which governs charter air services. This provision does not require a charter airline to obtain permission to land en route , provided it does not pick up or set down passengers or cargo. However, the practice of the parties over many years has been to require charter airlines to seek permission to land in all cases, and the article is now so interpreted. 82 82. The work of Sir Gerald Fitzmaurice during the d rafting process that eventually led to the formulation of Article 31 VCLT i s also worthy of note. Taking as a reference point the ICJ’s case law b etween 1951 and 1954, Fitzmaurice formulated the major principle s of treaty interpretation that formed the basis for the ILC draft provisions on treaty interpretation. He outlined three subsidiary principles of interpretation, 78 Steven Ratner, ‘International Law Rules on Treaty Interp retation’ in The Law and Practice of the Northern Ireland Protocol, edited by Christopher M cCrudden, Cambridge: Cambridge University Press (2022), pp. 80-91. 79 James Crawford, ‘A Consensualist Interpretation of Article 31(3) of the Vienna Convention on the Law of Treaties’ in Georg Nolte et al (eds.), Treaties and Subsequent Practice (Oxford University Press, 2013), pp. 29, 31. 80 Bruno Simma, ‘Miscellaneous thoughts on subsequent agreemen ts and practice’ in: Georg Nolte (ed.) Treaties and Subsequent Pra ctice (Oxford University Press, 2013), pp 46–51. 81 Anthony Aust, Modern Treaty Law and Practice, (Cambridge University Press, 2013), at p. 194. 82 B. Cheng, ‘Air Law’, Max Planck Encyclopedia of Public In ternational Law (1989), Vol. 11, pp. 8-9. 1203 ‘eff ectiveness’, ‘subsequent practice’, and ‘contemporaneity’, which he saw as complementary to the three primary ones: ‘actuality’, t he ‘natural and ordinary meaning’, and ‘integration’. With regard to the princip le of subsequent practice, Fitzmaurice remarked, as early as then, that: “Where the practice has brought about a change or development in the meaning of the treaty through a revision of its terms by conduct, it is permissible to give eff ect to this change or development as an agreed revision...” 83 83. The ICJ in its decision in Case Concerning the Land, Island and Maritime Frontier Dispute (El Salvador v Hondurus) 84 considered and explained how practice of parties assumes signifi cance in treaty interpretation: “380. The Chamber considers that, while both customary law and the Vienna Convention on the Law of Treaties (Art. 31, para. 3(b)) contemplate that such practice may be taken into account for purposes of interpretation, none of these considerations raised by Honduras can prevail over the absence from the text of any specifi c reference to delimitation. In considering the ordinary meaning to be gi ven to the terms of the treaty, it is appropriate to compare the m with the terms generally or commonly used in order to convey the idea that a delimitation is intended. Whenever in the past a special agreement has entrusted the Court with a task related to delimitation, it has spelled out very clearly what was asked of the Court: the formulation of principles or rules enabling the parties to agree on delimitation, the prec ise application of these principles or rules (see North Sea Continent al Shelf cases, Continental Shelf (Tunisia/Libyan Arab Jamahiriya) and Continental Shelf (Libyan Arab Jamahiriya/Malta) cases), or the actual task of drawing the delimitation line (Delimitation of the Mari time Boundary in the Gulf of Maine Area case). Likewise, in the Anglo- French Arbitration of 1977, the Tribunal was specifi cally entrusted by the terms of the Special Agreement with the drawing of the line. *********************** 83 G. Fitzmaurice, ‘The Law and Procedure of the International Court of Justice: Treaty Interpretation and Certain Other Treaty Points’ (1951) 29 British Yearbook of International Law 8. 84 ICJR (1992) 351 - Decision dated 12-09-1992, [General List No. 75] ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] 389. On the underlying question of the status of the waters of the Gulf which was thus raised before the Central American Court, there were by then three matters which practice and the 1917 Judgement took account of: fi rst, the practice of all three coasta l States had established and mutually recognized a 1 marine league (3 nautical miles) littoral maritime belt off their respective mainland coasts and islands (see the passage of the 1917 Judgement quoted in paragraph 400 below), in which belt they each exercised an exclusive jurisdiction and sovereignty, though with rights of innocent passage conceded on a mutual basis; second, all three States recognized a further belt of 3 marine leagues (9 nautical miles) for rights of “maritime inspection” for fi scal purposes and for national security; third, th ere was an Agreement of 1900 between Honduras and Nicaragua by which a partial maritime boundary between the two States had been delimited, which, however, stopped well short of the waters of the main entrance to the bay. ************************* 410. If the Gulf is an historic bay, it is necessary to determine the closing line of the waters of the bay. The norm al geographical closing line for the waters of the Gulf of Fonseca would b e the line Punta Amapala to Punta Cosigüina. This seems to have bee n the closing line recognized by the three coastal States in pra ctice. It is, moreover, the closing line referred to in the 1917 Judgement (loc cit., p. 706). It had not been necessary to say more, had not El Salvador elaborated a thesis of an “inner Gulf” and an “outer Gulf” , based on the reference in the Judgement of 1917, to an inner closing line from Punta Chiquirin, through Meanguera and Meangue rita, to Punta Rosario. The purpose of El Salvador’s reference to this inner line, in its argument before the Chamber, was apparently to suggest that the Honduran legal interest in the Gulf waters wa s limited to the area inside the inner line, the remainder being left to El Salvador and Nicaragua. But there is nothing in the Judgement of the Central American Court of Justice to support this. There is no suggestion in that Judgement that Honduras was excluded from the waters between that inner line and the outer closing line subject to the régime of condominium found by the Court.” 1205 84. In Case Concerning Kasikili/Sedudu Island- Botswana v Namibia 85 too, practice was given signifi cance. The ICJ held, quoting from the commentary of the ILC, that “(t)he importance of such subsequent practice in the application of the treaty, as an element of interpretation, is obvious; for it constitutes objective evidence of the understanding of t he parties as to the meaning of the treaty. Recourse to it as a means of interpretation is well-established in the jurisprudence of international tribunals.” (Op cit., p. 241, para. 15.)” 85. Donald Regan, in a paper “Understanding What the Vienna Convention Says About Identifying and Using ‘Source s for Treaty Interpretation’ Identifying and Using ‘Sources for Treaty Interpretation’ 86 writes this, about treaty practice: “Article 31 (3) (b) presents a diff erent complication. Article 31 (3) (b) says that the interpreter shall take into accou nt ‘any subsequent practice in the application of the treaty which est ablishes the agreement of the parties regarding its interpretation’. It is clear why practice is important. The point of the treaty is to di rect behaviour. But the treaty is in words, and words are never per fectly clear. In contrast, behaviour is the very stuff the treaty is about. The ILC Commentary says the practice is ‘objective evid ence’ of the understanding of the parties, and it quotes the Permanent Court of Arbitration, saying that practice is ‘le plus sûr commentaire du sens’ of the agreement.26 So, it is easy to see why concordant practice should be an authentic source if it is engaged in by a ll the parties. But Article 31 (3) (b) does not say the practice must be engaged in by all the parties; it says only that it must establish the agreement of all the parties. The ILC Commentary is very clear both t hat it must be the agreement of all, and that it need not be the practice of all.27 Now, we will see below that even if 31 (3) (b) contemplated only the 85 [1999] ICJ Rep 1045; (General List No. 98) 86 Donald Regan: Understanding What the Vienna Convention Says About Ide ntifying and Using ‘Sources for Treaty Interpretation’ Identifyi ng and Using ‘Sources for Treaty Interpretation’ University of Michigan (2017) < : https://repository.law.umich. edu/book_chapters/257> (accessed on 14.10.2023). ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] practice of all the parties, a practice that was engag ed in by some parties, but not all, could still be introduced under A rticle 32; and the interpreter would then consider how strong the partial practice was as evidence of a common understanding.” 86. The material cited in the preceding paragraphs, on the ILC Draft Conclusions and ICJ decisions, though not binding per se on this court, certainly off er valuable insight into treaty interpretation. In sum, whilst considering treaty interpretation, it is vital to take into account practice of the parties. There is no dispute that treaties co nstitute binding obligations upon their signatories. Yet, like all compacts, how the parties to any specifi c instrument view them, give eff ect 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. In this, a range of inte rests combine. The issue of treaty interpretation and tre aty 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 comm unity as operating in that particular sphere, which is re levant, and at times determinative. 87. This court is of the opinion that the treaty practice of Switzerland, Netherlands and France is dictated by conditions pe culiar to their constitutional and legal regimes. Could it conceiva bly 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 P arliament, 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 n egative. Likewise, the treaty practice in India points to a consistent pattern of behaviour when the signatory to an existing DTAA, points to t he event of a third 1207 state entering into OECD membership, and a resultant trigger event, the benefi cial eff ect given to the later third-party state has to be notifi ed in the earlier DTAA, as a consequential amendment, preceded by exchange of communication (and perhaps, negotiation) and acc eptance of that position by India. The essential requirement of a n otifi cation under Section 90 of the consequences of the trigger (or causative) e vent cannot be undermined. V . Conclusions 88. In the light of the above discussion, it is held and declared that: (a) A notifi cation under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give eff ect to a DTAA, or any protocol changing its terms or conditions, which has the eff ect 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 benefi t in regard to a matter covered in the DTAA of the fi rst nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notifi cation under Section 90. (c) The interpretation of the expression “is” has prese nt signifi cation. Therefore, for a party to claim benefi t 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. ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA [S. RAVINDRA BHAT, J.] 89. In view of the foregoing analysis and conclusions, it is held that the reasoning and fi ndings 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 seekin g intervention for impleadment, are disposed of. 90. As the facts in CA No. 1428/2023 relate to the interpretation of the India-Spain DTAA, which has not been considered in the present judgment, this matter is hereby de-tagged, to be listed before the appropriate bench.