ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI v. M/S NESTLE SA

JUDGMENT / ORDER OF THE SUPREME COURT

JUDGMENT S. RAVINDRA BHAT, J. Table of Contents* I. Facts .........................................................................................2 II. Arguments of parties ...............................................................6 A. Revenue’s contentions ........................................................6

*Ed. Note: Pagination as per the original Judgment.

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B. Contentions of the assessees/Respondents .....................12 III. Relevant statutory provisions ................................................20 IV. Analysis ..................................................................................21 A. General ..............................................................................21 B. The interpretation of the term “is”.................................30 C. Treaty practice of India, in relation to DTAAs and their Protocol, and practices of Netherlands, France and Switzerland .......................................................................32 D. International perspectives and practices .......................47 E. Vienna Convention on Law of Treaties ..........................49 V. Conclusions ......................................................................................57

1Copy pinpoint1. 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

2Copy pinpoint2. 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

1 By judgment dated 28.07.2016 passed by the Delhi High Court in W.P.(C) 4793/2014.

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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 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.

3Copy pinpoint3. 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

2 Judgment dated 22.04.2021 passed by the Delhi High Court in W.P. (C) No.9051/2020 and connected matters.

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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.

4Copy pinpoint4. 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,

3 [2016] 386 ITR 390 (Delhi)

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International Taxation,4 and of another judgment of the Delhi High Court in EPCOS Electronic Components S.A. v. Union of India5.

5Copy pinpoint5. 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,

4 [2018] 92 Taxmann.com 166 (Karnataka) 5 2019 SCC OnLine Del 9113

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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

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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.

6Copy pinpoint6. 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

7Copy pinpoint7. 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

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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.

8Copy pinpoint8. 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.

9Copy pinpoint9. 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.

10Copy pinpoint10. 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

9 1984 [2] SCR 664 10 2003 (Supp 4) SCR 222

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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.

11Copy pinpoint11. 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.

12Copy pinpoint12. 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.

13Copy pinpoint13. The learned ASG also highlighted that if the impugned judgment is left undisturbed the interpretation by it as well as the judgments which

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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.

14Copy pinpoint14. 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.

15Copy pinpoint15. 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.

16Copy pinpoint16. 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

11 [2011] 339 ITR 107 (SC) 12 [2013] ITR 354 (AP HC)

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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.

17Copy pinpoint17. 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.

18Copy pinpoint18. 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,

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and that there could not be any automatic applicability of such benefits given to other OECD members. B. Contentions of the assessees/Respondents

19Copy pinpoint19. Mr. 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.

20Copy pinpoint20. 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

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that too clearly requires the countries to inform each other and review the provisions with a view to extend the beneficial provisions.

21Copy pinpoint21. 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.

22Copy pinpoint22. 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.

23Copy pinpoint23. 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

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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.

24Copy pinpoint24. 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”

25Copy pinpoint25. 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.

26Copy pinpoint26. 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.

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27Copy pinpoint27. 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.

28Copy pinpoint28. 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).

29Copy pinpoint29. 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

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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.

30Copy pinpoint30. 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 Date OECD Dividend Art. 10 Entry into Notified Members Tax force Slovenia 13.01.2003 17.02.2005 31.05.2005 21.07.2010 5% Art 10(2)(a) has (pg.512 of (pg.501 of (pg.501 of 10% beneficial revenue’s revenue’s revenue’s ownership Compilation- compilation- Compilation- requirement Vol. III, pdf Vol. III), pdf Vol. III, pdf (pg.505 of pg.16) pg.5) pg.5) revenue’s Compilation- Vol. III, pdf pg.9) Lithuania 26.07.2011 10.07.2012 25.07.2012 05.07.2018 5% Art 10(2)(a) has (pg.534 of (pg.534 of (pg.534 of 10% beneficial revenue’s revenue’s revenue’s ownership Compilation- Compilation- Compilation- requirement Vol. III), pdf Vol. III, pdf Vol. III, pdf (pg.538 of pg.38 pg.38) pg.38) revenue’s compilation-Vol. III, pdf pg.42) Columbia 13.05.2011 07.07.2014 23.09.2014 28.04.2020 5% Art 10(2) (pg.91 (pg.90 Asses- (pg.90 Asses- (pg.90 Assessee’s Com- see’s Common see’s Common Assessee’s mon Comp.-Vol. Comp.-Vol. VI, Comp.-Vol. VI, Common VI, pdf pg.94) pdf pg.93) pdf pg.93) Comp.-Vol. VI, pdf pg.93)

31Copy pinpoint31. Learned counsel argued that the assessees are entitled to the benefit of the lower tax rate of 5% provided for in the DTAAs between India and Lithuania, Slovenia, and Colombia respectively, by relying on the MFN clause in the treaty/protocol to the India-Netherlands, India-Switzerland and India-France DTAAs in terms of which after the signing of the DTAA with these countries (and other protocols), if India entered into a DTAA

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with an OECD member where India has agreed for a rate of tax on dividend lower than the rate provided for in each of the DTAAs with Netherlands, Switzerland and France respectively, such lower rate also applies to those DTAAs. It is urged that the MFN clauses in the three DTAAs and their protocols clearly oblige Indian revenue officers to grant the benefit that is given to countries which subsequently entered into DTAAs with India, and were given favourable benefits, upon their entry into OECD.

32Copy pinpoint32. On the OECD membership issue, it was argued that the revenue’s only reason in the order denying the applicability of the lower rate of withholding tax at 5% - which was challenged by the assessee in the relevant impugned decision, 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.

33Copy pinpoint33. 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 invokes the MFN clause is to be accepted; then, the consequence would be that while interpreting Article 10(1) of India-Netherlands DTAA which also uses the same word “is” (“is a resident”) the same meaning ought to be given. However, it is undisputed that while claiming the benefit of Article 10, the assessee needs to be a resident of India/Netherlands only for the year in which the benefit of Article 10 is sought by an assessee. Therefore, when for Article 10, “is” does not postulate continuous requirement of residence, the same word “is” when

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it appears in the MFN clause can only mean that Slovenia etc. need to be OECD members only when the benefit of the MFN clause is invoked.

34Copy pinpoint34. Learned senior counsel appearing for Nestle argued in addition, that the third Protocol, between India and the Swiss Confederation 18, by Article 11(5) required that if India entered into agreement with another OECD country, providing for lower rate of taxation on dividends, interest and royalties at FTS, the same lower rate of taxation was to be given to Swiss tax entities.19 It relies on the fact that India and Lithuania-DTAA was signed on 26.07.2011; the date of its notification was 25.07.2012. Lithuania became an OECD member on 05.07.2018. Likewise, the India-Colombia DTAA was signed on 13.05.2011 and notified on 23.09.2014; Colombia entered OECD on 28.04.2020. These two DTAAs provided lower rates of taxation, as compared with the India-Switzerland DTAA. It was argued that the purpose of amending the relevant provisions of the DTAA, by the third Protocol was to automatically provide the same treatment to Switzerland; counsel relies on the expression that the lower rate given to the later OECD member by India “shall also apply between both Contracting States under this Agreement as from the date on which such Convention, Agreement or Protocol enters into force”. Counsel contrasts this with similar provisions in the third Protocol. The latter require the contracting states to enter into negotiations. Nestle underlines that the 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

18 Notified by the Indian government on 13.08.2011 19 Article 5 of the third protocol which amended Articles 10, 11, 12 and 22 inter alia, read as follows: “in respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royal- ties and fees for technical services), if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD signed after the signature of this Amending Protocol, India limits its taxa- tion at source on dividends, interest, royalties or fees for technical services to a rate lower than the rate provided for in this Agreement on the said items of income, the same rate as provided for in that Convention, Agree- ment or Protocol on the said items of income shall also apply between both Contracting States under this Agreement as from the date on which such Convention, Agreement or Protocol enters into force.”

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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.

35Copy pinpoint35. Learned senior counsel also referred to the opinions of Professor Dr. Robert J Dannon and Prof. Dr. Stef Van Weeghel on the history of treaty provisions and the applicable rules of interpretation, to support the assessees’ arguments. III. Relevant statutory provisions

36Copy pinpoint36. Section 9020 of the Income Tax Act reads as follows: “90. Agreement with foreign countries or specified territories. 1 (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

20 Section 90 (1) was substituted with effect from 010.10.2009. The earlier provision was amended three times. Section 90 (2A) was inserted with effect from 01-04.2013 and amended with effect from 01-04-2016. It was later omitted by Act 17 of 2013. Section 90 (4) substituted, by Act 17 of 2013, the “a certificate, containing such particulars as may be prescribed, of his being a resident” (w.e.f. 1-4-2013) to the present provision. Section 90 (5) was inserted by w.e.f. 1-4-2013.Explanation 3 was inserted by Section 32 of Act 23 of 2012, s. 32 (w.e.f. 01-10-2009) and Explanation 4 was inserted by Act 7 of 2017, Section 39 (w.e.f. 1-4-2018).

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(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double 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 sub-section (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 (4) shall also provide such other documents and information, as may be prescribed.

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Explanation 1.- For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation 2.—For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government. Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force. Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.”

37Copy pinpoint37. The relevant extracts of the DTAAs and the MFN clause contained within them, are extracted in Part IV.C below. IV. Analysis A. General

38Copy pinpoint38. Treaty making power vests exclusively with the Union, per Article 253 of the Constitution, and the relative entries in the Union List (List I, VIIth Schedule). Entering into a treaty is an attribute of sovereignty, and the power to do vests solely in the Union executive - as opposed to the states, or the shared (concurrent) domain within the distribution of administrative powers under the Constitution; thus, it can be traced to Article 73 of the Constitution. The structure and phraseology of Article 253 leaves one in no doubt, that

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it is when a treaty is enacted by law, or enabled through legislation, which assimilates it, that such provisions are enforceable in India.

39Copy pinpoint39. Duncan B. Hollis21, 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.”

40Copy pinpoint40. In State of W.B. v. Jugal Kishore More22, 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 Mithibarwala23 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 Constitution of India recognises this position. If a treaty either requires alteration of or addition to existing law, or affects the rights of the subjects, or are treaties on the basis of which obligations between the treaty-making state and its subjects have to be made enforceable in municipal courts, or which, involves raising or expending of money or conferring new powers on the government recognizable by the municipal courts, a legislation will be necessary.

41Copy pinpoint41. In the judgment reported as V.O. Tractoroexport v. Tarapore & 24 Co this court underlined that “16. We may look at another well-recognised principle. In this country, as is the case in England, the treaty or International Protocol or

21 Duncan Hollis: Executive Federalism : Forging New Federalist Constraints on the Treaty Power” Legal Studies Research Paper Series available at http : //ssrn.com/ abstract=895623 22 1969 (1) SCR 320 23 1964 (6) SCR 461 24 (1969) 3 SCC 562

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convention does not become effective or operative of its own force as in some of the continental countries unless domestic legislation has been introduced to attain a specified result. Once, Parliament has legislated, the Court must first look at the legislation and construe the language employed in it. If the terms of the legislative enactment do not suffer from any ambiguity or lack of clarity they must be given effect to even if they do not carry out the treaty obligations. But the treaty or the Protocol or the convention becomes important if the meaning of the expressions used by the Parliament is not clear and can be construed in more than one way. The reason is that if one of the meanings which can be properly ascribed is in consonance with the treaty obligations and the other meaning is not so consonant, the meaning which is consonant is to be preferred. Even where an Act had been passed to give effect to the convention which was scheduled to it, the words employed in the Act had to be interpreted in the well- established sense which they had in municipal law. (See Barras v. Aberdeen Steam Trawling & Fishing Co. Ltd. [(1933) AC 402])”

42Copy pinpoint42. This court, in Maganbhai Ishwarbhai Patel & Ors. v. Union of India & Ors.25 followed the ruling of the Privy Council in Attorney-General for Canada v. Attorney-General for Ontario & Ors.26 (which had made some observations in the context of a rule applicable within the British Empire). This court’s ruling in Maganbhai Ishwarbhai (supra) is the most significant, on this aspect. The relevant observations are as follows: “It will be essential to keep in mind the distinction between (1) the formation, and (2) the performance, of the obligations constituted by a treaty, using that word as comprising any 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

25 1970 (3) SCR 53 26 [1937] A.C. 326

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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 default.” These observations are valid in the context of our Constitutional set up.”

43Copy pinpoint43. The issue was more pointedly dealt with by the concurring judgment of J.C. Shah, J (who relied on Oppenheim’s International Law, 8th Edition): “...Such treaties as affect private rights and, generally, as required for their enforcement by English Courts a modification of common law or of a statute must receive parliamentary assent through an enabling Act of Parliament. To that extent binding treaties which are part of International Law do not form part of the law of the land unless expressly made so by the Legislature. ********************************* The binding force of a treaty concerns in principle the contracting States only, and not their subjects. As International Law is primarily a law between States only and exclusively, treaties can normally have effect upon States only. This Rule can, as has been pointed out by the Permanent Court of International Justice, be altered by the express or implied terms of the treaty, in which case its provisions become self-executory. Otherwise, if treaties contain provisions with regard to rights and duties of the subjects of the contracting States, their Courts, officials, and the like, these States must take steps as are necessary according to their Municipal Law, to make these provisions binding upon their subjects, Courts, officials, and the like.”

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Shah, J also referred to Articles 73 and 253 and further commented: “80...By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition of the entry into an international treaty in times either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The Executive is qua the State competent to represent the State in all matters international and may by agreement, convention or treaties incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under Entries 10 and 14 of List I of the Seventh Schedule. But making of law under that 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.”

27 [1984] 2 SCR 664

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44Copy pinpoint44. The holding in the decisions discussed above may thus be summarized: (i) The terms of a treaty ratified by the Union do not ipso facto acquire enforceability; (ii) 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. (iii) 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. (iv) The application of such treaties is binding upon the Union. Yet, they “are not by their own force binding upon Indian nationals”. (v) Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or affects the rights of citizens or others or modifies the law of India. (vi) If citizens’ rights or others’ rights are not unaffected, or the laws of India are not modified, no legislative measure is necessary to give effect to treaties. (vii) In the event of any ambiguity in the provision or law, which brings into force the treaty or obligation, the court is entitled to look into the international instrument, to clear the ambiguity or seek clarity.

45Copy pinpoint45. The clearest enunciation of law, on Section 90 can be found in Union of India (UOI) & Ors. v Azadi Bachao Andolan & Ors 28. Apart from noticing the decisions of various High Courts (i.e. Commissioner of Income Tax v. Visakhapatnam Port Trust29, Commissioner of Income Tax v. Davy Ashmore India Ltd.30, Leonhardt Andra Und Partner, Gmbh v. Commissioner

28 2003 (Supp4) SCR 222 29 [1983]144ITR146(AP) 30 [1991]190 ITR 626 (Cal)

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of Income Tax31, Commissioner of Income Tax v. R.M. Muthaiah32 and Arabian Express Line Ltd. of United Kingdom & Ors. v. Union of India 33) this court held as follows: “The provisions of Sections 4 and 5 of the Act are expressly made “subject to the provisions of this Act”, which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income Tax Act and a notification issued Under Section 90, is no longer res integra. ************** ***************

26. A survey of the aforesaid cases makes it clear that the judicial consensus 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. The contention of the respondents, which weighed with the High Court viz. that the impugned circular No. 789 is inconsistent with the provisions of the Act, is a total non-sequitur. As we have pointed

31 [2001] 249 ITR 418 (Cal) 32 [1993]202 ITR 508 (KAR) 33 [1995] 212 ITR 31 (Guj)

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out, Circular No. 789 is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section (2) of section 90. In other words, the circular shall prevail even if inconsistent with the provisions of Income Tax Act, 1961 insofar as assessees covered by the provisions of the DTAC are concerned. ****************** ****************

29. In our view, the contention is wholly misconceived. Section 90, as we have already noticed (including its precursor under the 1922 Act), was brought on the statute book precisely to enable the executive to negotiate a DTAC and quickly implement it. Even accepting the contention of the respondents that the powers exercised by the Central Government under section 90 are delegated powers of legislation, we are unable to see as to why a delegate of legislative power in all cases has no power to grant exemption. There are provisions galore in statutes made by Parliament and State legislatures wherein the power of conditional or unconditional exemption from the provisions of the statutes are expressly delegated to the executive. For example, even in fiscal legislation like the Central Excise Act and Sales Tax Act, there are provisions for exemption from the levy of tax. (See Section 5A of Central Excise Act, 1944 and Section 8(5) of the Central Sales Tax Act, 1956). therefore we are unable to accept the contention that the delegate of a legislative power cannot exercise the power of exemption in a fiscal statute.”

46Copy pinpoint46. The legal position discernible from the previous discussion, therefore is that upon India entering into a treaty or protocol does not result in its automatic enforceability in courts and tribunals; the provisions of such treaties and protocols do not therefore, confer rights upon parties, till such time, as appropriate notifications are issued, in terms of Section 90(1).

47Copy pinpoint47. The various DTAAs, their relative Protocols and the date(s) of their notification under Section 90 of the Income Tax Act, based on the submissions of parties, and the materials placed on the record, are summarized in a tabular chart:

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SUMMARIES OF DTAAs, PROTOCOLS & NOTIFICATIONS IN TABULAR FORMAT Contracting signing of/ date of entry Notification, Date of signing Effective Notification Whether State #2 entry into into force if any relevant date of said if any member treaty amending amendment/ of OECD protocol protocol

Netherlands Treaty & 21.01.1989 27.03.1989 13.08.199934 01.04.1997 or 30.08.1999 Yes (13 Protocol - 01.04.1991 No- 13.07.1988 or 01.04.1998 vember or 01.04.1995 1961) (based on the provision, in relation to the concerned country)

10.05.2012 02.11.2012 14.01.2013 - giving effect from 02.11.2012

USA Treaty & 18.12.1990 20.12.1990 No amendment. NA NA Yes (12 Protocol: [Note – USA No- [earlier agree- 12.09.1989 does not have vember ment dated an MFN clause] 1961) 15.06.1989; also see instruc- tion dated 28.04.2003 and 23.10.2007]

UK Treaty & 26.10.1993 11.02.1994 30.10.2012 27.12.2013 10.02.2014 Yes (2 [had an Protocol: - to be given May earlier agree- 25.01.1993 retrospective 1961) ment dated effect from 30.06.1956; 27.12.2013 see also instruc- tion dated 19.03.2004]

Yes (13 Belgium 26.04.1993 01.04.1998 Sep- 01.10.1997 31.10.1997 19.01.2001 (protocol) (for India) tember 1961)

01.04.1995 or 01.04.1997 10.07.2000 Treaty & (based on the Yes (07 France provision) Protocol - 01.08.1994 07.09.1994 August 29.09.1992 12.08.2009 1961) 12.08.2009

34 13/30.08.1999 (date of signing mentioned as 13.08.1999 in Protocol, but as 30.08.1988 in amending notification dated 30.08.1999).

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Contracting signing of/ date of entry Notification, Date of signing Effective Notification Whether State #2 entry into into force if any relevant date of said if any member treaty amending amendment/ of OECD protocol protocol

In force from 20.12.2000 Protocol amending 1994 1 January 07.02.2001 19.10.1994/ Treaty (2000) - 2001 (Swit- 29.12.1994 16.02.2000 zerland); 1 April 2001 (India) Yes (28 Switzerland Treaty and Sep- Protocol - 01.01.1995 21.04.1995 In force from tember 02.11.1994 (Switzer- 10.10.2011 1961) land) and 01.04.1995 Protocol (India) amending 1994 1 January 27.12.2011 Treaty (2010) - 2012 (Swit- 30.08.2010 zerland); 1 April 2012 (India)

Germany [replaced old- No amendment er agreements Yes (27 Treaty & [Note – Ger- notified on Sep- Protocol: 26.10.1996 29.11.1996 many does not NA NA 13.09.1960, tember 19.06.1995 have an MFN 27.04.1979 1961) clause] and 02.03.1990]

Philippines Treaty & Protocol: 21.03.199435 02.04.1996 02.02.2005 No 12.02.1996

Protocol 14.08.2013 amending the Yes (28 - to be Sweden Convention Sep- 24.06.1997 25.12.1997 17.12.1997 16.08.2013 given effect and Protocol tember to from - signed on 1961) 16.08.2013 17.02.2013

11.09.2018 16.01.2000 - to have (correction effect from Treaty and by notifica- Yes (4 Portuguese 08.08.2018 Protocol: 30.04.2000 tions dated 24.06.2017 08.08.2018 August Republic (Art. 26 says 11.09.1998 25.08.2000 1961) 10.08.2018 and in the 20.09.2005) footnote)

Protocol Notifica- amending the tion dated date of entry Yes (21 Convention 27.10.2017 Slovenia 13.01.2003 17.02.2005 31.05.2005 into force is July and Protocol - to have 21.12.2016 2010) - signed on effect from 17.05.2016 01.03.2017

35 Unclear if there is perhaps a typographical error in the Notification produced before this court.

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Contracting signing of/ date of entry Notification, Date of signing Effective Notification Whether State #2 entry into into force if any relevant date of said if any member treaty amending amendment/ of OECD protocol protocol

20.05.2010 Treaty & Yes (28 - with Finland Protocol: 19.04.2010 - NA NA January effect from 15.01.2010 1969) 01.04.2011

25.07.2012: Treaty & Yes (05 to have Lithuania Protocol: 10.07.2012 - NA NA July effect from 26.07.2011 2018) 01.04.2013

Treaty & Yes (28 Colombia Protocol: 07.07.2014 23.09.2014 - NA NA April 13.05.2011 2020)

C. The interpretation of the term “is”

48Copy pinpoint48. The High Court had interpreted the term “is” occurring in the DTAAs [see Clause IV(2)36 of the India-Netherlands DTAA – the other two clauses in relation to France and Switzerland being similar], which according to it “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 heterological word, i.e., it does not describe itself”. According to that interpretation of ‘is, when the request for parity is made by a party seeking aid of the DTAA and the Protocol containing a “same treatment” or in other words, a pull in clause, the court has to consider whether at that time the third party state is enjoying better 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

36 “If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, 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.” [emphasis supplied]

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DTAA was signed on 26.07.2011; and notified on 25.07.2012 37. The date of membership of Lithuania into OECD was 05.07.2018. The India-Colombia DTAA was signed on 13.05.2011; its date of 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.

49Copy pinpoint49. Thus, in all three cases, the three “third party” nations: Lithuania, Colombia and Slovenia, were initially not members of OECD when they entered into treaties and protocols with India; they became members later.

50Copy pinpoint50. In Jagir Kaur v. Jaswant Singh38 Section 488 of the erstwhile Criminal Procedure Code read as follows: “Proceedings under this Section may be taken against any person in any district where he resides or is, or where he last resided with his wife, or, as the case may be, the mother of the illegitimate child.” This court considered the meaning of “is” in the above provision: “The crucial words of the sub-Section are, “resides”, “is” and “where he last resided with his wife”. Under the Code of 1882 the Magistrate of the District where the husband or father, as the case may be, resided only had jurisdiction.” The court then emphasized that the term “is” was fact dependent, and had to be read contextually: “The purpose of the statute would be better served if the word “resides” was understood to include temporary residence. The juxtaposition of the words “is” and “last resided” in the sub-Section also throws light on the meaning of the word “resides”. The word “is”, as we shall explain later, confers jurisdiction on a Court on the basis of a casual visit and the expression “last resided”, about which also we

37 Notification No. 28/2012 [F. No. 503/02/1997-FTD-1]/S.O. 1693(E), dated 25-7-2012 38 (1964) 2 SCR 73

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have something to say, indicates that the Legislature could not have intended to use the word “resides” in the technical sense of domicile. The word “resides” cannot be given a meaning different from the word “resided” in the expression “last resided” and, therefore, the wider meaning fits in the setting in which the word “resides” appears.” In P. Anand Gajapati Raju v. P.V.G Raju39 in the context of the Arbitration and Conciliation Act, 1996, this court explained that “is” normally has present signification: “the phrase which is the subject of an arbitration agreement does not, in the context, necessarily require that the agreement must be already in existence before the action is brought in the Court. The phrase also connotes an arbitration agreement being brought into existence while the action is pending. Blacks Law Dictionary has defined the word is as follows: “This word, although normally referring to the present, often has a future meaning, but is not synonymous with shall have been. It may have, however, a past signification, as in the sense of has been.” Again, in Vijay Kumar Prasad v. State of Bihar40 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.”

51Copy pinpoint51. 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.

39 (2000) 4 SCC 539 40 (2004) 5 SCC 196

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

52Copy pinpoint52. 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 State which is a member of the Organisation for Economic Co-operation and Development, India, should limit its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income “then, as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention”

53Copy pinpoint53. The DTAA between India and Germany entered into force on 26.10.1996; the DTAA between India and Sweden entered into force on 25.12.1997, the India-Swiss Confederation DTAA entered into force on 19.10.1994, and the DTAA between India and the United States of America entered into force on 18.12.1990. These states were members of the OECD. The Union limited the taxation at source on dividends, interest, royalties, fees for technical services and payments for the use of equipment to a rate lower or a scope more restricted than that provided in the DTAA between India and the Netherlands on the said items of income. Consequently, the notification dated 30.08.1999, provided the following benefits expressly on different dates, having regard to the fact that India entered into DTAAs with OECD members and gave them effect, subsequently: “Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Convention notified by the said notification which are necessary for implementing the aforesaid Convention between India and the Netherlands, namely:

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I. With effect from April 1, 1997, for the existing paragraph 2 of article 10 relating to dividends the following paragraph shall be read : “2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent. of the gross amount of the dividends.” II. With effect from April 1, 1997, for the existing paragraph 2 of article 11 relating to interest the following paragraph shall be read : “2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the 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 defi ned in this article (other than services described in sub-paragraph (b) of this paragraph): (i) during the first five taxable years for which this Convention has effect,--

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(A) 15 per cent. of the gross amount of the royalties or fees for technical services as defined in this article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub- division or a public sector company ; and (B) 20 per cent, of the gross amount of the royalties or fees for technical services in all other cases ; and (ii) during the subsequent years, 15 per cent. of the gross amount of royalties or fees for technical services ; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 4 and fees for technical services as defined in this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 4(b) of this article, 10 per cent. of the gross amount of the royalties or fees for technical services.

3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2.

4. The term “royalties” as used in this article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including motion picture films and works on film or video-tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience ; and (b) payments of any kind received as consideration for the use of, or the right to use industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of articles 8 and 8A (shipping and air transport) from activities described in paragraph 2(a) of article 8 or paragraph 4(b) of article 8A.

5. For purposes of this article, “fees for technical services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

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(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this article is received ; or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design.

6. Notwithstanding paragraph 5, “fees for technical services” does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property 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 one of the States, carries on business in the other State, in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for technical services are effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.

8. Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub- division, a local authority or a resident of that State. Where, however,

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the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, has in one of the States a permanent establishment or a fixed base in connection with which the contract under which the royalties or fees for technical services are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

9. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services, having regard to the royalties or fees for technical services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable according to the laws of each State, due regard being had to the other provisions of this Convention.” IV. With effect from April 1, 1995, for paragraph 6 of article 12 relating to royalties and fees for technical services referred to in paragraph III above the following paragraph shall be read: “6. Notwithstanding paragraph 5, ‘fees for technical services’ does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection 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

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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 relating to royalties and fees for technical services referred to in paragraph III above the following paragraph shall be read : “4. The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, for information concerning industrial, commercial or scientific experience.” VII. The memorandum of understanding and the confirmation of understanding, dated September 12, 1989, with reference to paragraph 4 of article 12 of the Indo-USA Double Taxation Avoidance Convention (DTAC), will apply mutatis mutandis for the purpose of paragraphs III, IV, V and VI above.”

54Copy pinpoint54. It is therefore, clear that the date on which the relief of rate of taxation for interest and dividends was specified to be 01.04.1997; different dates (01.04.1995 and 01.04.1998) were applied as applicable to the definition of fees and technical services and other details; the rates, too varied, depending on the period(s). The second aspect, is that the notification under Section 90 was issued on 30.08.1999. The third, and most significant aspect is that the favourable or beneficial treatment was given to other OECD nations on 26.10.1996 (India-Germany); the DTAA between India and Sweden entered into force on 25.12.1997, the India-Swiss Confederation DTAA entered into force on 19.10.1994 itself. These earlier dates, did not

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result in India automatically extending benefits of Article IV of the India- Netherlands DTAA Protocol to Netherlands. The relevant phrase in that provision (Article IV) obliged India to grant to the Netherlands, the same benefit to it, as was granted to the other nation in that third party state’s DTAA or Protocol with India: “as from the date on which the relevant Indian 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”

55Copy pinpoint55. Clearly, therefore, so far as India-Netherlands DTAA goes, there is established and clear precedent, of behaviour, in relation to treaty practise and interpretation. This was uncontested, and is a matter of record.

56Copy pinpoint56. In relation to France, the India-France DTAA and Protocol came 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.”

57Copy pinpoint57. The DTAA between India and USA had been entered into force, on 18.12.1990; the DTAA between India and Germany had been entered into on 26.10.1996. These DTAAs gave benefits or more favourable treatment