Assessing Officer Circle (International Taxation) Vs Nestle SA (Supreme Court)
Introduction: The recent Supreme Court judgment in Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi Vs Nestle Sa has shed light on the necessity and mandatory condition of a notification under Section 90(1) for a court, authority, or tribunal to give effect to a Double Taxation Avoidance Agreement (DTAA) or any protocol altering its terms. In this article, we’ll delve into the key aspects of this ruling and its implications.
The Case Background: The case revolved around the interpretation of the Most Favored Nation (MFN) clause in DTAA. Specifically, it addressed whether the MFN clause should be automatically enforced or if it requires a separate notification. The leading precedent in this matter was Steria India Ltd Vs CIT [(2016) 386 ITR 390 (Del)].
Steria’s Argument: Steria argued that clause 7 of the Protocol in the Indo-French DTAA did not necessitate a separate notification and should be immediately operational. The Authority for Advance Rulings (AAR) did not concur with this interpretation initially. However, Steria’s position found favor when it sought recourse through a writ petition before the High Court. The High Court ruled that a protocol is an integral part of the treaty and doesn’t require a separate notification for the MFN clause’s application.
The ASG’s Argument: The learned Additional Solicitor General (ASG) contended that treaties are unenforceable without enabling parliamentary legislation. Citing Section 90, the ASG emphasized the necessity of notification for any treaty or convention’s effect, invoking the Gramophone India and Azadi Bachao judgments as supporting references.
Supreme Court’s Conclusion: The Hon’ble Supreme Court, after thorough examination, affirmed that treaties and protocols do not automatically confer rights upon the parties upon India’s entry into them. They emphasized that appropriate notifications under Section 90(1) are essential. The key takeaways from the judgment are:
(a) A Section 90(1) notification is necessary and a mandatory condition for courts, authorities, or tribunals to enforce a DTAA or any protocol modifying its terms, thereby altering existing provisions of law.
(b) The mere existence of an MFN clause in a DTAA or protocol does not automatically require extending the same benefit to another nation that entered into a DTAA with India. In such cases, a separate notification under Section 90 is imperative.
(c) The interpretation of the term “is” is of present significance. Therefore, to claim the benefit of a “same treatment” clause based on the entry of a DTAA with India, the relevant date is the DTAA’s entry into force with India, not any subsequent date when the other nation becomes an OECD member.
Conclusion: The Supreme Court’s judgment in AO Vs Nestle SA underscores the significance of a Section 90(1) notification in the enforcement of DTAA and its protocols. It emphasizes the need for clarity and a strict legal process to ensure that international tax agreements are adhered to. This ruling has far-reaching implications for international taxation in India, highlighting the importance of proper legal procedures and notifications in international agreements. It is essential for taxpayers, authorities, and legal professionals to take note of this landmark judgment and ensure compliance with the provisions of Section 90(1) to avoid any legal complications related to DTAA enforcement.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
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 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 the 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 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.
I. Facts
2. One of the first judgments1 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 Protocol to the India-France DTAA the more restrictive definition 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 ruled that the Protocol could not be treated as forming part of the DTAA itself. It further held that restrictions imposed by the Protocol were only to limit the taxation at source for the specific items mentioned therein; the restriction was only on the rates. Further, the ‘make available’ clause found in the India-UK DTAA could not be read into the expression ‘fee for technical services’ occurring in the India-France DTAA unless there was a notification 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 notification 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 considered as part of the treaty itself and does not have to be separately notified for the purposes of application of the MFN clause. Therefore, in Stenio, 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 with the subject DTAA read with the Protocol. In both cases, certificates 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 certificates were valid till 30.03.2021. The validity period of the certificates 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 files 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 certificate did not grant the withholding rate at 5%. The respondent sought to justify its certificate 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 had 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 subsequent to the India-Netherlands DTAA), contrary to the revenue’s stand, no fresh notification was required. In support, reliance was placed upon the rulings in Court in Steria (India) Ltd. v. Commissioner of Income-Tax3, the judgment of the Karnataka High Court in Apollo Tyres Ltd. v. Commissioner of Income Tax, International Taxation,4 and of another judgment of the Delhi High Court in EPCOS Electronic Components S.A. v. Union of India5.
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 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 beneficial provisions contained in the Conventions/DTAAs, executed both prior to or after the coming into force of the 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, 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 fulfils 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 Clause IV (2) in the context of the aforementioned third States with 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 affairs 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 certificate 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 itself. The examples of autological words are expressions such as “English”, “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 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)6 which is also under challenge. In the revenue’s appeals7 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 court 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 Solicitor General, Shri N. Venkatraman (hereafter “ASG”) that the impugned judgments are unsustainable. The revenue points out that under the Indian Constitution, especially by operation of Articles 253 (read with Entries 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 treaty 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 are unenforceable, having regard to the express terms of Article 2538 which clothe Parliament alone with the power to make laws “notwithstanding” other provisions in that chapter- which delineates and distributes legislative power between the Union and States. Counsel submitted that India follows the “dualist” practise, which means that international treaties and conventions are not, upon their ratification, automatically assimilated into municipal law (i.e. the national legal system) but would require enabling legislation. This 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 flowing from a convention, as in creation of rights and liabilities of third parties to conventions or treaties, do not operate on their own, 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 the respondents assessees that similar or identical treatment 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 Protocol was notified 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 benefits to a country which had entered into DTAA with India because the later Protocol with France and the consequent notification omitted to extend any benefit 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 notified on 30.08.1999. The plain reading of that notification shows that the Protocol itself was triggered by the benefit 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 notification issued on 30.08.1999 (notifying the Protocol between India and Netherlands), conferred benefits based upon the concessions given to different countries, with effect from different dates depending on the nature of the benefits, rate of tax withholding, definition 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 benefit or advantage to Netherlands. It was after bilateral negotiations that the Protocol was entered into, and yet later a notification under Section 90 was issued, bringing it into effect.
12. These practices were in consonance with the mandate and requirements of Section 90. The learned ASG also submitted that without the benefit of any notification, any tax administrator, an Assessing Officer or revenue authority would find 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 Swiss, Dutch 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 Jethmalani v. Union of India11, referring to the General Rule on Interpretation of Vienna 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 treaties, and provisions therein, would be that ordinary meaning of words be given effect to, unless the context requires otherwise. That such treaties are drafted by diplomats, and not lawyers, also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase, or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. This principle of interpretation was applied by the Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA v. Department of Revenue12.
16. It was argued thus, that a treaty should be interpreted ordinarily, and the ordinary meaning of the words be given effect to apart from ensuring that the interpretation should not render any word, phrase, or sentence redundant. The grammatical and literal meaning of the India-Netherlands MFN clause reveals that the benefit of reduced rate mentioned therein would be available only in case of such subsequent Indian treaties 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 per 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” signifies the time when the provisions of treaty are to be applied. They have also relied on dynamic interpretation of Article 3(2) which allows taking into account the definition in domestic law when a particular term is not defined 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, 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 royalties and fee for technical services) and their definitions. These notifications were preceded by negotiations, communications and letters, exchanged between India and the other country. In many cases, the amending notification granted one benefit, while denying other benefits (granted to other, third countries, whose DTAAs conferred such benefits after Netherlands or France or Switzerland’s DTAAs were entered into). This clearly showed that such notifications were necessary, and that there could not be any automatic applicability of such benefits given to other OECD members.
B. Contentions of the assessees/Respondents
19. Poros Kaka, Mr. P. Chidambaram, Mr. S. Ganesh and Mr. Percy Pardiwala, learned senior counsel; Mr. Lovkesh Sawhney, 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 notified under section 90(1) and it has come into force, there is further no legal requirement to notify any subsequent amendment to the DTAA which becomes operative automatically as a consequence of the trigger of the MFN clause to the DTAA. Counsel urged that Section 90 only requires notification of a treaty or protocol, and does not mandate each clause of such agreement to be further notified separately. A plain reading of Section 90 of the Act demonstrates that it does not require each article or paragraph thereof of an already notified agreement to be further notified 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 notification 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 subject MFN clause in the Protocol to India-Netherlands DTAA has no such requirement.
20. The contrast between India’s DTAAs with Netherlands and Switzerland, is that the relevant MFN clause in the India-Switzerland DTAA originally required initiation of negotiation, to apply the beneficial provision agreed with other OECD member. This was repealed by notification 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 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 amended by Protocol to reflect such beneficial terms. Naturally, once that amendment is agreed pursuant to bilateral negotiations, it has to be notified. 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 notification to bring into force the beneficial provisions from subsequent DTAAs or by way of a notified 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 clause is automatic in operation.
The use of different language in the DTAA by the two contracting states is indicative of their intent and cannot be disregarded 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 differences in the language of the clauses bear significance.
23. This court was shown the observations of the Income Tax Appellate Tribunal (ITAT) Mumbai in SCA Hygiene Products AB v. DCIT13, and the ITAT Delhi decision in Mitsubishi Electric India Pvt Ltd v Commissioner of Income Tax 14 where the tribunal has noted the difference 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 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 revenue did not challenge – had, attained finality.
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 notification 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 notification is unilateral and 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 from the date of entry into force of the beneficial DTAA, or w.e.f. 1st April of the following fiscal year, since India follows the financial year (April-March) pattern. This limited aspect was agreed by the Dutch authorities. It is argued that no such reservation was noted by India for MFN in clause IV of Protocol.
27. Counsel submit that the absence of a unilateral notification 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 LLP15, which held that the State cannot breach a treaty to which it is a party by referring to domestic law-be it legislative, executive, or judicial decision. The decision in Engineering Analysis Centre of Excellence P. Ltd. v. CIT16 applied the principle in Director of Income Tax v New Skies Satellite BV17 wherein the Delhi High Court held that mere executive 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 the 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 effect from date of entry into force of that relevant convention. Similarly, the decree by Netherlands on 28.02.2012 maintained that beneficial provision of the USA-DTAA on restricted scope of FTS should apply with effect from 01-04-1991 (1st April of the fiscal 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 notification is required for MFN benefits 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 notifications statutorily required to give effect to automatic amendments but just represents the understanding of the Dutch authorities. Under Netherlands law to give effect 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, 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:
