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

The Supreme Court has held that a Double Taxation Avoidance Agreement (DTAA) cannot be given effect to by a court, authority or a tribunal unless it has been notified by the Central Government under Section 90 of the Income Tax Act.The Court held that until the Government of India issues a notification as per Section 90, the DTAA treaty is not enforceable per se in Indian courts.A bench comprising Justices S Ravindra Bhat and Dipankar Datta held so while allowing a batch of appeals filed by the Income Tax Department against the judgments of the Delhi High Court.During the judgment pronouncement, Justice Ravindra Bhat orally said :"We have discussed the arguments related to the requirement of section 90 and also the treaty practice of India, treaty practice of other countries and in the light of international treaty practice, especially Article 31 (3)(b), we have said that the treaty practice is not bilateral; it can be unilateral. We have said that as long as India issues the notification, the Courts are bound. Till then, we are of the opinion that the treaty is not enforceable per se in Indian Courts."Justice Bhat further said that the following are the conclusions in the judgment : (a) A Notification under Section 90 of the Income Tax Act is a necessary and a mandatory condition for a court, authority or a tribunal to give effect to a Double Taxation Avoidance Agreement or any protocol changing its terms and conditions which has the effect of altering the existing provisions of law. (b) The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90;(c) The interpretation of the expression “is” has present signification. Therefore, for a party to claim benefit of a “same treatment” clause, based on entry of DTAA between India and another state which is member of OECD, the relevant date is entering into treaty with India, and not a later date, when, after entering into DTAA with India, such country becomes an OECD member, in terms of India’s practice.Referring to various precedents and Articles 253 and 73 of the Constitution, the judgment authored by Justice Bhat stated :"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)"The Supreme Court thus set aside the judgment delivered by the Delhi High Court on 22.04.2021 in Concentrix Services Netherlands B V v/s. Income Tax Officer TDS & Anr (W.P.(C) 9051/2020) and the subsequent judgments which were delivered by the High Court following Concentrix Services.Before the Top Court, were the batch of appeals arising 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 (OECD). Importantly, this clause provides for lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services (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.Thus, the issues to be adjudicated were divided into two heads. Firstly, whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement (DTAA) was not an OECD member yet (at the time of entering into such DTAA); and secondly, whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued.At the outset, the Court observed that the treaty making power vests exclusively with the Union, per Article 253 of the Constitution. “The structure and phraseology of Article 253 leaves one in no doubt, that it is when a treaty is enacted by law, or enabled through legislation, which assimilates it, that such provisions are enforceable in India.,” the Court added. The Court bolstered these observations by citing several judgments including State of Gujarat v. Vora Fiddali Badruddin Mithibarwala, 1964 (6) SCR 461, and summarised the legal principles driven out of them. These included:The terms of a treaty ratified by the Union do not ipso facto acquire enforceability; The Union has...

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

Gyanvi Khanna

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