Double Taxation Avoidance Agreement Cannot Be Enforced Unless Notified By Centre Under Section 90 Income Tax Act : Supreme Court

Thus, the issues to be adjudicated were divided into two heads. Firstly, 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 (DTAA) was not an OECD member yet (at the time of entering into such DTAA); and secondly, whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued.

At the outset, the Court observed that the treaty making power vests exclusively with the Union, per Article 253 of the Constitution.

“The structure and phraseology of Article 253 leaves one in no doubt, that it is when a treaty is enacted by law, or enabled through legislation, which assimilates it, that such provisions are enforceable in India.,” the Court added.

The Court bolstered these observations by citing several judgments including State of Gujarat v. Vora Fiddali Badruddin Mithibarwala, 1964 (6) SCR 461, and summarised the legal principles driven out of them. These included:

1. The terms of a treaty ratified by the Union do not ipso facto acquire enforceability;
2. The Union has exclusive executive power to enter 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.
3. Parliament can refuse to perform or give effect 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.
4. The application of such treaties is binding upon the Union. Yet, they "are not by their own force binding upon Indian nationals".
5. Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or affects the rights of citizens or others or modifies the law of India.

After penning down these observations, the Court opined that upon India entering into a treaty or protocol does not result in its automatic enforceability in courts and tribunals; the provisions of such treaties and protocols do not therefore, confer rights upon parties, till such time, as appropriate notifications are issued, in terms of Section 90(1).

Notably, the Court, in its judgment, based on the submissions of parties, and the materials placed on the record, also summarized in a tabular chart various DTAAs, their relative Protocols and the date(s) of their notification under Section 90 of the Act.

The interpretation of the term “is”

Moving forward, the Court addressed the interpretation of the term “is” occurring in the DTAAs. For convenience, the same reads as follows:

“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, 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."

The Court cited several precedents including Vijay Kumar Prasad v. State of Bihar, wherein it was explained that “is” normally has present signification. In the matter of Vijay Kumar, the Court held:

“Although the expression normally refers to the present, often it has a future meaning. It may also have a past signification 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.”

In view of the same, the Court opined that it is clear that the expression “is” has a present signification and it derives meaning from the context. Given this interpretation, the conclusion is that when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity.

Treaty practice of India, in relation to DTAAs and their Protocol, and practices of Netherlands, France and Switzerland

Discussing the treaty practice of the aforementioned countries (as the impugned orders pertained to the DTAAs with these countries), the Court clearly opined that the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates.

“In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts.”

However, the Court opined, in India, either the treaty concerned has to be legislatively embodied in law, through a separate statute, or get assimilated through a legislative device, i.e. notification in the gazette, based upon some enacted law (some instances are the Extradition Act, 1962 and the Income Tax Act, 1961). “Absent this step, treaties and protocols are per se unenforceable.,” the Court asserted.

In the light of international treaty practice, the Court also referred to Article 31 of the VCLT which reflects the general rules of treaty interpretation. The Court clarified that though India is not a signatory to the convention, however, the convention has been accepted by consensus as reflecting the customary international law on general rules of treaty interpretation and is thus still relevant in the Indian context. Article 31(3) of the VCLT provides the aspects that shall be taken into account, while interpreting the provisions of a treaty. These included “(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding the interpretation of the treaty or the application of its provisions.”

At the end, the Court also clarified that since the facts in CA No. 1428/2023 (Commissioner Of Income Tax Vs. M/S Epcos Electronics Components S.A. (Now Known As TDK Electronics Components)) relate to the interpretation of the India Spain DTAA, which has not been considered in the present judgment, thus, this matter was hereby de-tagged, to be listed before the appropriate bench.