TMI Blog2023 (10) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, therefore is that upon India entering into a treaty or protocol does not result in its automatic enforceability in courts and tribunals; the provisions of such treaties and protocols do not therefore, confer rights upon parties, till such time, as appropriate notifications are issued, in terms of Section 90(1). The interpretation of the term is - Expression is has a present signification and it derives meaning from the context. Given this interpretation, the conclusion is that when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity. Treaty practice of India, in relation to DTAAs and their Protocol, and practices of Netherlands, France and Switzerland - The status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be notified in the earlier DTAA, as a consequential amendment, preceded by exchange of communication (and perhaps, negotiation) and acceptance of that position by India. The essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined. ORDER: (a) A notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law. (b) The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90. (c) The interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondents...............................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 (hereafter OECD ). This clause provides for lowering of rate of taxation at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 notification 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 satisfied, the benefit could not be availed unless there was a specific notification by the Government of India effectuating the benefit 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 notified on 27.03.1989. This DTAA was amended by a subsequent notification dated 30.08.1999. The respondent assessees (writ petitioners before the High Court2) 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 India each applied under Section 197 of the Act in the prescribed form, seeking a certificate that authorized them to deduct withholding tax at a lower rate of 5% in consonance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of another judgment of the Delhi High Court in EPCOS Electronic Components S.A. v. Union of India 2019 SCC OnLine Del 9113 . 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 Conventions/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 following conditions are fulfilled: 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/DTAA, 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 fulfilled, then, from the date on which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issued by Netherlands, pursuant to the Protocol, as a method of interpretation of how the event, i.e. entry of another country into OECD, which had a previous 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 Officer Circle (International Taxation) W.P. (C) No. 3243 of 2021 decided on 04.06.2021 which is also under challenge. In the revenue s appeals Petition for Special Leave to Appeal (C) No. 5360/2022 in Nestle what was considered by the Delhi High Court, were provisions of the India-Switzerland DTAA and its three protocols. The other judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn, and needs an intervening action by the Union, giving effect to such obligation. 9. The ASG relied on Section 90 which requires the issuance of a notification, to give effect to any treaty or convention. It is argued that in the absence of any law, mere entering into a treaty or convention 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 India enters into a treaty or convention with other nations which happens to be a member 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 benefit 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 notification to give effect 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and French authorities; such executive decrees or orders could not possibly bind Indian Revenue Authorities and had in fact been issued unilaterally. 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 judgments which followed it, would preclude enquiry into whether any DTAA or international instrument was in fact assimilated in municipal law under Section 90 or any like provision. 14. Learned counsel highlighted that in the case of Nestle in fact, a plain and straightforward review of the first and second protocols (of the India- Switzerland DTAA) demonstrates that without notification in accordance with Indian law, they could not have applied which was in fact, the occasion for the notifications dated 07.02.2001 and 27.02.2001 respectively. Counsel particularly highlighted the concerned provision, i.e. Section 90 (1) of the Act. 15. The learned ASG cited Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Article 3(2) of the DTAAs also gives prominence to the context, as it clearly 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 requires. 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 to claim parity of treatment. 18. It was lastly argued that the notifications, which amended existing DTAAs in respect of the three countries, reveal two aspects: one, that they were issued because of benefits granted to countries, other than Netherlands, France and Switzerland; two, that such subsequent notifications were triggered by the lowering of rate, or treatment of certain kinds of income (dividends, interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to give the benefit 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 notify such beneficial provision whenever the MFN clause gets triggered. Counsel also referred the MFN clause in the Protocol to the India- Philippines DTAA, to say that that too clearly requires the countries to inform each other and review the provisions with a view to extend the beneficial provisions. 21. Learned counsel submitted that the difference in language, is unimportant, because Article 7(3) of the India-Netherlands DTAA shows that treaty partners are same; yet the instrument uses different language to denote the same terms. Article 7(3) specifically notes that where the expense limit is relaxed for computing the profits attributable to 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 notified, the terms of the treaty shall be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not a bilateral amendment by both states. The assessees highlight, in this regard that the notification nowhere clarifies that both states had agreed to its contents. In contrast Notification No. GSR 382(E)/ Notification No.2/2013 dated 14.1.2013 which notified 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 Notification dated 30.08.1999 does not have one. Contrast this with the 2012 bilateral amendment made in the India-Netherlands DTAA by the Protocol which entered into force on 02.11.2012 and was notified vide Notification No. 2/2013. 26. The purpose of this unilateral notification by India is clear from the Dutch communication dated 18.11.1999 which states that messages were exchanged and there was a difference of understanding between Indian and Dutch authorities on the limited aspect as to whether the MFN clause would be applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is that it has to be signed by the government, after which it has to be approved by both houses of Parliament and then, ratified. After such approval and ratification, nothing remains, and consequently, formal decrees follow. Similar arguments were advanced in respect of French orders and Swiss decrees and orders, which gave effect 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 effect to, wherever necessary. 30. Next, the assessees dealt with the argument that 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 Notified OECD Members Dividend Tax Art. 10 Slovenia 13.01.2003 (pg.512 of revenue s Compilation- Vol. III, pdf pg.16) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, was that the benefit 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 its own DTAA was not the reason given for rejection in the order impugned 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 time of execution of their own DTAA, and also at the time claim for lowering 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 invoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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 first and second Protocol, were worded differently. Earlier, in respect of the same event, i.e. India s entering into an agreement with another contracting state, granting lower rate of 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, automatically afforded 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom an agreement referred to in subsection (1) applies, shall not be entitled to claim any relief under such agreement unless 4 a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. (5) The assessee referred to in sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ralist Constraints on the Treaty Power Legal Studies Research Paper Series available at , 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 1969 (1) SCR 320 , this court held that the executive may make treaties with foreign States for the extradition of criminals, but those treaties can only be carried into effect 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 1964 (6) SCR 461 this court observed that in India, unlike some other countries the stipulations of a treaty duly ratified do not by virtue of such event (i.e. signing the treaty alone) have the force of law and Article 253 of the Constitutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween (1) the formation, and (2) the performance, of the obligations constituted by a treaty, using that word as comprising any agreement between two or more sovereign States. Within the British Empire there is a well-established rule that the making of a treaty is an executive act, while the performance of its obligations, if they entail alteration of the existing domestic law, requires legislative action. Unlike some other countries, the stipulations of a treaty duly ratified do not within the Empire, by virtue of the treaty alone, have the force of law. If the national executive, the Government of the day, decide to incur the obligations of a treaty which involve alteration of law they have to run the risk of obtaining the assent of Parliament to the necessary statute or statutes.... .Parliament, no doubt, ... .has a Constitutional 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 so leave the State in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the laws of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect 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 the Rules of international law are incorporated into national law and considered to be part of the national law, unless they are in conflict with Act of Parliament. Comity of Nations or no, Municipal Law must prevail in case of conflict. 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 conflicts 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 conflicts with it. 44. The holding in the decisions discussed above may thus be summarized: (i) The terms of a treaty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification 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 intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there 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 notification under section 90 towards implementation of the terms of the DTAs 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IN TABULAR FORMAT Contracting State #2 signing of/ entry into treaty date of entry into force Notification , if any Date of signing relevant amending protocol Effective date of said amendment/ protocol Notification if any Whether member of OECD Netherlands Treaty Protocol - 13.07.198 8 21.01.1989 27.03.1989 13.08.1999 .13/30.08.1999 (date of signing mentioned as 13.08.1999 in Protocol, but as 30.08.1988 in amending notification dated 30.08.1999). 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 November 1961) 10.05.2012 02.11.2012 14.01.2013 - giving effect from 02.11.2012 USA [earlier agreement dated 15.06.1989; also see instruction dated 28.04.2003 and 23.10.2007] Treaty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Protocol: 12.02.199 6 21.03.1994 Unclear if there is perhaps a typographical error in the Notification produced before this court 02.04.1996 02.02.2005 No Sweden 24.06.199 7 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 effect to from 16.08.2013 Yes (28 September 1961) Portuguese Republic Treaty and Protocol: 11.09.199 8 30.04.2000 16.01.2000 (correction by notifications dated 25.08.2000 and 20.09.2005) 24.06.2017 08.08.2018 11.09.2018 - to have effect from 08.08.2018 (Art. 26 says 10.08.2018 in the footnote) Yes (4 August 1961) Slovenia 13.01.200 3 17.02.2005 31.05.2005 Protocol amending the Convention and Protocol - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benefits. 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 DTAA was signed on 26.07.2011; and notified on 25.07.2012 Notification No. 28/2012 [F. No. 503/02/1997-FTD-1]/S.O. 1693(E), dated 25-7-2012 . 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 Notification 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 notified 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 notified on 27.10.2017. 49. Thus, in all three cases, the three third party nations: Lithuania, Colombia and Slovenia, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Again, in Vijay Kumar Prasad v. State of Bihar (2004) 5 SCC 196 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 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. 51. From the above discussion, 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. 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 Kingdom 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 St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 beneficial owner of the interest the tax so charged shall not exceed 10 per cent. of the gross amount of the interest. III. With effect from the April 1, 1997, for the existing article 12 relating to royalty, fees for technical services and payments 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 Contracting 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 beneficial 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-paragraph (a) of paragraph 4 and fees for technical services as defined in this article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 other 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 with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in article 14 (independent personal services) of this Convention. 7. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals, making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in article 14 (independent personal services) of this Convention. V. With effect from April 1, 1997, for paragraph 2 of article 12, relating to royalties and fees for technical services referred to in 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 beneficial 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 effect from April 1, 1998, for paragraph 4 of article 12 relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me into force on 01.08.1994, after the notification 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 profits), 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 restriction 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 between 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 terms of the corresponding paragraph in the Convention, Agreement or Protocol with that third State immediately after the entry into force of that Convention, Agreement or Protocol and, if the competent authority of the other Contracting State so requests, the provisions of that paragraph shall apply under this Convention from that entry into force. 57. The DT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .09.1992 when India-France DTAA was 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 benefits, too should have applied. The revenue argues that for the more restrictive definitions in the DTAAs in India-Portugal and India-UK treaties, to be automatically imported into India-France DTAA there is need for a notification, before its scope could be imported. It is pointed out that the Protocol, of 10.07.2000 did not extend the expanded definition, and instead confined the benefits to definition and treatment of income from dividends, interest, and royalties. The make available condition, in other DTAAs was consciously omitted from the notification. 60. The omission of certain benefits (available to other member countries of OECD who had entered into DTAAs with India) in the subsequent notification, dated 10.07.2000, is another indication that a trigger event such as India granting favourable relief to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benefits 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 benefits 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; and the main purpose of such structuring is obtaining benefits under this Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equires is that 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 effective. Therefore, inbuilt in the entire eco-system of the DTAAs is the inarticulate 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 satisfied, before its benefits 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 notification 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 fulfilling its obligations under DTAAs and their Protocols. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to payments made in respect of the right or property which is first granted or under a contract which is signed, after the 12th day of December, 1988. A copy of the notification 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 original DTAA was unambiguous and emphatic; it required that the trigger event would lead to 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 . In such an instance, of language, in the protocol, being as emphatic as the third Protocol to the India-Switzerland DTAA, the treaty practice of India was consistent; a separate notification was later issued. 67. The respondents had relied on decrees/decisions of each of the countries, to underline t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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, after the signing of the amending protocol dated 30 August 2010, India 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 rate 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 August 2010, India concluded two new double taxation agreements 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nco- 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 'beneficial 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 Article 12 shall be replaced by that of 10 % following the tax treaty concluded 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. The Federal Council has the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts. However, in India, either the treaty concerned has to be legislatively embodied in law, through a separate statute, or get assimilated through a legislative device, i.e. notification in the gazette, based upon some enacted law (some instances are the Extradition Act, 1962 and the Income Tax Act, 1961). Absent this step, treaties and protocols are per se unenforceable. E. International perspectives and practices 73. Klaus Vogel Klaus Vogel on Double Taxation Conventions (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 authorized to make the declarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ev. 250 (1967) *************** *************** 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 effect is passed by Parliament after the treaty enters into force under international law. McNair, A.D., The Law of Treaties (1961) at 81; Oliver, J.D.B., 15 BTR 388 (1970) 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. See Baker, P., Double Taxation Conventions and International Tax Law (1994) at 46 A special law is also required in Canada Ward, D.A., Ward s Tax Treaties (1993/94), at 6 and other members of the Commonwealth. Under Netherlands constitutional law, the treaty becomes applicable domestically at the time it enters into force, Van Raad, K., 47 MBB 49 (1978) reflecting the 'monist' theory of international law. In general, the conflict between 'monistic' and 'dualist' theories has been overcome by a compromise view. See in general: Tunkin, G Wolfrum, R. (eds.), International Law and Municipal Law (1988) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , may be prohibited. 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. 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 F. Vienna Convention on Law of Treaties 74. Article 31 of the VCLT 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 context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between 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 other parties as an instrument related to the treaty. 3. There shall be taken into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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, Conclusion 5(1), Id. and may take several forms. Conclusion 6(2), Id 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 action, 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 . JL Brierly, The Law of Nations, 6th Ed. (Oxford University Press, 1963), 59. In a more dynamic sense, it represents the process of continuous interaction between States. It also covers subsequent treaties with third States Irina Buga, Subsequent Practice as a Means of Treaty Interpretation in Modification 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ILC Draft Conclusions further provide that a common understanding would be required, regarding the interpretation of a treaty which the parties are aware of and accept. Such an agreement may, but need not, be legally binding for it to be taken into account. Conclusion 10(1), Id 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 subsequent practice when the circumstances call for some reaction. Conclusion 10(2), Id 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 ). 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 79. ILC commentaries, such as the ILC Draft Conclusions on subsequent practice, are an influential subsidiary means for determining rules of law, within the meaning of the term in Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. Anthony Aust, Modern Treaty Law and Practice, (Cambridge University Press, 2013), at p. 194 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. B. Cheng, 'Air Law', Max Planck Encyclopedia of Public International Law (1989), Vol. 11, pp. 8-9 82. The work of Sir Gerald Fitzmaurice during the drafting process that eventually led to the formulation of Article 31 VCLT is also worthy of note. Taking as a reference point the ICJ s case law between 1951 and 1954, Fitzmaurice formulated the major principles of treaty interpretation that formed the basis for the ILC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ********************** 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: first, the practice of all three coastal 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 fiscal purposes and for national security; third, there 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation . It is clear why practice is important. The point of the treaty is to direct behaviour. But the treaty is in words, and words are never perfectly clear. In contrast, behaviour is the very stuff the treaty is about. The ILC Commentary says the practice is objective evidence of the understanding of the parties, and it quotes the Permanent Court of Arbitration, saying that practice is le plus s r 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 all 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 that 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 practice of all the parties, a practice that was engaged in by some parties, but not all, could still be introduced under Article 32; and the interpreter would then consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequential amendment, preceded by exchange of communication (and perhaps, negotiation) and acceptance of that position by India. The essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined. V. Conclusions 88. In the light of the above discussion, it is held and declared that: (a) A notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law. (b) The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification ..... X X X X Extracts X X X X X X X X Extracts X X X X
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