The phrase “Vasudev Kutumbakam” means whole world is one family, the message herein is also relevant in case of international tax relations with objective to have effective tax mechanism catering interest of all stakeholders. Every country has to depend on other country for trade and services, and cannot remain as Island. Every country has sovereign right to tax its residents on their global income, apart from having right to tax income accruing, arising or received on account of activity carried on in its territory. Thereby, situation arises where same income gets taxed twice, causing cascading effect on the cost to carry on business in that territory. Prosperity of nation does not come by levy of taxes but it comes through cross border trade, commerce and investments. This necessitates the entering into agreements to eliminate double taxation, exempting the income already taxed or providing credit for the same.

Alike, any other contractual relations, a county s into negations with another country to execute DTAA. The contracting countries engage in bargaining with an aim to secure maximum advantage out of the same. One of the important objectives of DTAA is to provide certainty to the taxpayers. Uncertainty is one of the important features of tax laws and lack of certainty proves to be an hindrance for taking business decisions. Similarly, foreign companies, which are looking for investment opportunities in other countries, one of the important consideration to take their investment decisions is certainty in the taxation policy and the efficiency of the redressal system in case of a dispute.

India, now aspires to become “Vishwa Guru”, standing at very defining moment after many centuries, this has increased huge expectations on our constitutional arms executive, legislature and judiciary to play an important to role to deal with the uncertainties in tax regime, requiring settling of important interpretational issues.

The Hon’ble Supreme Court in the recent judgment of Assessing Officer Circle (International Taxation) 2 (2)(2) New Delhi v. Nestle SA,</em > has played very important role in clearing the uncertainty, laying down important principle of interpretation of tax statutes trying to achieve finality to interpretation of MFN clauses. Treaty making power vests exclusively with the Union, per Article 253 of the Constitution, and the relative entries in the Union List. 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 it is when a treaty is enacted by law, or enabled through legislation, which assimilates it, that such provisions are enforceable in India.

It is pertinent to note that the Union has exclusive executive power to enter into international treaties and conventions under Article 73 and Parliament, holds the exclusive power to legislate upon such conventions or treaties. However, the terms of a treaty ratified by the Union do not ipso facto acquire enforceability, 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, leaving the Union in default. The application of such treaties is binding upon the Union. Yet, they are not by their own force binding upon Indian nationals. 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. If citizen’s rights or other’s rights are not unaffected, or the laws of India are not modified, no legislative measure is necessary to give effect to treaties. 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. Therefore, 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 Hon’ble Supreme Court made detailed analysis of treaties and conventions including of about 14 countries, and made opinion that the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. Generally, in many countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process, the treaty is assimilated into the body of domestic law, enforceable in courts. However, in India, either the treaty concerned has to be legislatively embodied in law, through a separate statute, or get assimilated through a legislative device, i.e. notification in the gazette, based upon some enacted law, without this, treaties and protocols are per se unenforceable. Considering treaty interpretation, it is vital to take into account practice of the parties. There is no dispute that treaties constitute binding obligations upon their signatories. Yet, like all compacts, how the parties to any specific instrument view them, give effect to its provisions, and the manner of acceptance of such conventions or compacts are in the domain of bilateral relations and diplomacy. Much depends upon the relationship of the parties, the mutuality of their interests, and the extent of co-operation or accommodation they extend to each other. In this, a range of interests combine. The issue of treaty interpretation and treaty integration into domestic law is driven by constitutional and political factors subjective to each signatory. Therefore, domestic courts cannot adopt the same approach to treaty interpretation in a black letter manner, as is required or expected of them, while construing enacted binding law.

After detailed analysis the Hon’ble Supreme Court held that:

1. A notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.
2. 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 DAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90.
3. 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.

Now, the present Hon’ble Supreme Court ruling, has great impact on present treaties and arrangements with various nations. It has also impacted the assesses relying on rulings of various Hon’ble High Courts allowing enforceability of MFN without notification, this will require afresh analysis of tax policy. It may also cause significant tussle between tax authorities and assesses in the pending matters as well as in closed cases.