India, being a constitutional sovereign democratic republic, has its existence demarcated in the comity of nations, in which it co-exists as a responsible fiscal member. Being, this situation, the obligations of our nation are outlined under the Directive Principles in Article 51 of the Constitution of India whereby it is manifested

“ The state shall endeavour to – …………

(c) foster respect for international law and treaty obligations in the dealings of organised people with one another.”

Although India is a non-member of the OECD, nonetheless, being an important source country and an important large-scale economy, the position of India on matters relating to tax is considered on an important scale by the OECD. Primarily known for the formulation of the Model Tax Convention on Income and Capital, the OECD has also published an exhaustive commentary on the possible interpretations of the convention. The OECD model commentary has held to have interpretative value in a number of judicial precedents, and with the passage of time this view is gaining stronghold in judicial fora.

In this connection it is pertinent to refer to the commentaries on the Introduction of the OECD Model with reference to the position of the NON- OECD ECONOMIES POSITION ON THE OECD MODEL TAX CONVENTION.

Paragraph 14 and 15 of the Introduction to the OECD model 20171 recognize that the influence

of the model as a framework of reference has extended beyond the OECD member countries, more notably being used as a basis for the United National Model Double Convention between Developed and Developing Countries. and that their inputs would be relevant to the updating of the OECD Model Convention on Income and Capital. This decision was taken in the 1991 meeting of the Committee of Fiscal Affairs.

Furthermore, in 1996 it was decided to include non-member countries in annual meetings for in order to discuss issues related to negotiation, implementation and interpretation of the OECD model convention. In the same meeting the Fiscal Committee of the OECD, it transpired that the non-member states should be given the freedom to raise disagreements with the article as well as the commentary. More importantly, the OECD recognized the importance of input of non- member nations towards the development of the model as well as the commentary, and explicitly mentioned that non- members could be expected to contribute towards development only if they were given the freedom to disagree. So, India being an independent sovereign non- member does

1. Deviate from the OECD model and commentary, particularly with nations who are non OECD members.
2. Have disagreements/reservations on the OECD model as well as the commentary.

Paragraph 5 of the position of Non-OECD Economies Position on the OECD Model Tax Convention on the Introduction deals with the results of the observations or disagreements with the OECD model commentary. For reference the commentary to the Introduction of the OECD Model Convention on Income and Capital might be made.

The validity of positions of opposition taken on the OECD model itself and its commentaries are not without its own set of controversies and/ or divergent views. In the approximate period continuing to about the first decade of the 21st century we did witness a general abhor to rely on the OECD model and commentaries, which can be gauged from what follows:

1. In the case of in Schellenberg Wittmer, In re*2, holding in favour of the revenue, the AAR appeared to be reluctant to apply the OECD commentary for interpretation of the India Swiss DTAA, and held that the executive Indian position of expressing reservations and objections as a matter of being sacrosanct, as also the matter of India not being a member of the OECD and thus this the commentary having no value in the eyes of domestic law. However, subsequently in a more celebrated case, it was held that that mere positions of opposition taken on the OECD commentaries do not cause anything of a binding nature.
2. In the New Skies Satellite case3, the change if any must be caused in the language of the article of the DTAA itself, mere taking of a position on the commentary would not provide any stand of legal sanction. The judgement further went on to state that any unilateral change to the terms of the agreement by way of amendment of the underlying statute would not be a permissible act.

   “59. On a final note, India’s change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise……”

3. In CIT v. P.V.A.L. Kulandagan Chettiar4 which was further upheld5 the Hon’ble Supreme Court noted

“Taxation policy is within the power of the Government and section 90 enables the Government to formulate its policy through treaties entered into by it and even such Treaty determines the fiscal domicile in one State or the other and, thus, prevails over the other provisions of the Act. It would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or in any other agreements. [Para 16]”

However, it must also be borne in mind, that OECD commentary although not binding on India, does offer a supplementary means of interpretation, and provide an aid in dispute resolution. There have been numerous instances in particular in the past decade wherein the higher forums have expressed a positive view

1. The one that stands tall amongst them all is the recently pronounced case by the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd.6 The Court had occasion to deal extensively with the issue of the applicability of the OECD model commentary in this case and in para 159 categorically underscored the importance of usage of the OECD model commentary as a base for the tax paying public for interpretation as far as unchanged articles adopted from the OECD model treaty are concerned. In paragraph 158 of the same judgement the Hon’ble Supreme Court acknowledged the interpretative relevance of the OECD Commentary provided the articles on the DTAA do not diverge with the text of the OECD Model convention.

“158. It is thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention, incorporated in the DTAAs in the cases before us, will continue to have persuasive value as to the interpretation of the term “royalties” contained therein.

159. Viewed from another angle, persons who pay TDS and/or assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the treaty provisions that govern them. Such persons and/ or assessees can thus place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions. From this point of view also, the OECD Commentary is significant, as the Contracting States to which the persons deducting tax/assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for parting with copyright, or income derived from licence agreements which is then taxed as business profits depending on the existence of a PE in the Contracting State.”

2. In the case of Right Florists7 commendably represented by my mentor Sri Subhas Agarwal, it was held by the Hon’ble tribunal at Kolkata at para 17 and 18 that even when a DTAA was entered into by an OECD member country with a non-member country, it would be safe to assume that the words in the commentary as to be used as a supplementary aid for interpretation without any legality being read into the explicit terms of the commentary.

“17. Coming to the reservations expressed by Government of India, the first issue that needs to be considered is as to what is the role of ‘reservations’ and ‘observations’ in judicial examination. In our humble understanding, the ‘reservations’ so expressed or ‘observations’ so made to the commentary is relevant only to the extent that in interpreting any tax treaty, entered into after expressing those ‘reservations’ or making those ‘observation’, to that extent, related commentary cannot be taken as contemporanea exopsitio. It is so for the following reasons. When an expression or a clause is picked up from the OECD Model Convention, the normal presumption is that the persons using the said clause or expression are also aware about the meanings assigned to the said clause or expression by the OECD and have used it in the same sense and for the same purpose. Hon’ble Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust[1983] 144 ITR 146/15 Taxman 72, referred to the OECD Commentary on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Redcliffe’s observation in Ostime (Inspector of Taxes) v. Australian Mutual Provident Society [1960] 39 ITR 210 (HL) which have described the language employed in those documents as the ‘international tax language’. These documents are thus in the nature of contemporanea expositio inasmuch as the meaning indicated in these documents to the clauses and expressions in the tax treaties can be inferred as the meaning normally understood in, to use the words of Lord Redcliffe, ‘international tax language’

developed by the organizations like OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non OECD country, one may generally proceed on the basis that it is used in the same meaning and with the same connotations as assigned to it by the OECD Model Convention Commentary. Of course, even contemporanea expositio is not a binding interpretation of statutory provisions and there are serious limitation in its legal application, but when it comes to interpreting a tax treaty, the position is entirely different and this principle has much bigger role to play because interpreting a tax treaty is a case in which emphasis has to be on true intentions rather than on literal meaning. As observed by Federal Court of Canada, in Gladden

v. Her Majesty the Queen 85 DTC 5188, at p. 5190, “Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties”. True intentions of the parties to an agreement, which a tax treaty inherently is [See observations of Harman, J. in Union Texas Petroleum Corpn. v. Critchley [1988] STC 69, to the effect that “I consider that I should bear in mind that this double tax agreement is an agreement. It is not a taxing statute, although it is an agreement about how taxes should be imposed”], are best appreciated with reference to the meaning of those terms as commonly understood at the point of time when treaty was entered into. However, with the expression of ‘reservations’ or ‘observations’ on the commentary, to that extent, this presumption about commonly understood meaning of the expressions comes to an end.

18. In the view of discussions above, the Government of India’s reservations on the OECD Commentary are relevant only to the extent that OECD Commentary, to that extent, cannot be treated as a fair index of intention of

the Government of India and as contemporanea expositio in respect of tax treaties entered into by India after so expressing its reservations. Beyond that, in our humble understanding, these reservations have no role in judicial analysis.”

3. In the case of Asia Satellite Communications it was noted that in case of similar language of articles between the OECD model convention and the applicable DTAA, the OECD model commentary can always be relied upon8.

“Even when one looked into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the assessee got a boost. The Organisation of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India. Article 12 of the said model DTAA contains a definition of ‘royalty’ which is in all material respects virtually the same as the definition of ‘royalty’ contained in clause (iii) of theExplanation 2 to section 9(1)(vi ). The assessee had relied upon the commentary issued by the OECD on the aforesaid model DTAA. [Para 74]

The Tribunal had discarded the aforesaid commentary of the OECD only on the ground that it was not safe to rely upon the same. However, what was ignored was that when the technical terms used in the DTAA are the same as in section 9(1)(vi), for better understanding all these very terms, the OECD commentary can always be relied upon. The Apex Court has emphasized so in a number of judgments, clearly holding that the well-settled internationally accepted meaning and interpretation placed on identical or similar terms employed in the various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Income- tax Act. [Para 77] For the aforesaid reasons, the view taken by the Tribunal in the impugned judgment on the interpretation of section 9(1)(vi) could not be accepted. [Para 79]”

4. Fortifying this position the Mumbai ITAT in the case of Metchem Canada Inc9 deciding the case in the favour of the assessee

“Article 24(2) of the Indo-Canadian DTAA is worded on the lines of article 24(3) of the OECD Model Convention. In fact, it is verbatim extract from the Model Convention. It is clear from article 24(3) of the Model convention that it includes the deduction on account of head office expenditure. In addition to the deduction on normal business expenditure of a permanent establishment as permissible under the domestic taxation laws, the deduction is also required to be allowed for a proportion of overheads of the head office and such a deduction is to be allowed without any restriction other than those imposed on the resident enterprise. This makes two things clear – (a) that the restriction on admissibility of expenditure in accordance with the domestic law, according to the OECD Commentary, is in respect of the normal business expenditure incurred by the PE, and (b) that the deduction on account of overheads of the head office is to be allowed without placing any restriction on such deduction save and except such restrictions as may also be placed on the resident enterprises. As the provisions of article 24(2) of the Indo- Canadian DTAA and the provisions of article 24(3) of the OECD Model Convention are in pari materia, the OECD Model Convention Commentary has a key role in determining the scope and connotations of article 24(2) of the Indo-Canadian DTAA. As per the OECD Commentary, placing a restriction on the deduction on account of overheads of the head office, except when the same restriction is also placed on the resident enterprises, does constitute discrimination under article 24. The taxation of a permanent establishment of a Canadian company, by the reason of placing a restriction

on deduction of head office expenditure which is not applicable in the case of resident companies, does, therefore, constitute less favourable tax treatment in India than the taxation levied on Indian enterprise carrying on the same activities in India. Viewed in this perspective, it is clear that the limitation on deduction of head office expenditure as stipulated by section 44C would be hit by the non-discrimination clause in the Indo-Canadian DTAA. In any event, on a plain reading of the provisions of article 24(2), one is of the considered view that a restriction on admissibility of head office overheads of PE of a Canadian company constitutes discrimination against such a PE vis-a-vis a domestic Indian entity because no such restriction is applicable for deduction of head office or controlling office overheads of an Indian entity. It puts PE of a Canadian company to an unfair disadvantage inasmuch as even legitimate business expenses attributable to the PE and deductible under section 37(1) cannot be allowed as a deduction in the light of restriction placed under section 44C, whereas all the legitimate business expenses of the Indian entity operating in India would be allowed as deduction. The scope of deduction under section 37(1), thus, stands curtailed for PE of a Canadian company. [Para 6]

Thus as can be seen from various judicial pronouncements, whereas in the earlier stages of international judicial interpretation, courts have generally refrained from giving weightage to the OECD model commentary, in the last decade or so, the judicial preference for reliance on the OECD commentary’s relevance as a tool for supplementary interpretation of tax treaties has increased. Part of it could also be owed to the fact that with increased tendency for treaty abuse and treaty shopping, tax bases of countries are getting decreased, so in order to combat the same, standardized measures are being preferred so that the same scales apply internationally. The prime motive being tax abuse is countered and consistency around applicability of tax measures increase in the comity of nations.

1. https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full- version_g2g972eeen#page18

2 [2012] 24 taxmann.com 299 (AAR)/[2012] 210 Taxman 319 (AAR)/[2012] 253 CTR 178 (AAR)[27-08-2012]

3 DIT v. New Skies Satellite BV [2016] 68 taxmann.com 8/28 Taxman 577/382 ITR 114 (Delhi)

4 CIT v. P.V.A.L. Kulandagan Chettiar 2004] 267 ITR 654 (SC)/[2004] 189 CTR 193 (SC)[26-05-2004]

5 CIT v. P.V.A.L. Kulandagan Chettiar [2008] 300 ITR 5 (SC)[01-11-2007]

6 Engineering Analysis Centre of Excellence (P.) Ltd v. Commissioner of Income-tax [2021] 125 taxmann.com 42 (SC)/[2021] 281Taxman 19 (SC)/[2021] 432 ITR 471 (SC)[02-03-2021]

7 [2013] 32 taxmann.com 99 (Kolkata – Trib.)/[2013] 25 ITR(T) 639 (Kolkata – Trib.)/[2013] 143 ITD 445 (Kolkata – Trib.)/[2013] 154 TTJ 142 (Kolkata – Trib.)[12-04-2013]

8 Asia Satellite TelecommunicationsCo. Ltd. v. Director of Income-tax [2011] 9 taxmann.com 168 (Delhi)/[2011] 197 Taxman263 (Delhi)/[2011] 332 ITR 340 (Delhi)/[2011] 238 CTR 233 (Delhi)[31-01-2011]

9 [2006] 100 ITD 251 (Mumbai)/[2006] 5 SOT 121 (Mumbai)/[2006] 99 TTJ 702 (Mumbai)[30-09-2005]