[Shantanu Singh is a 4th year B.A., LL.B. (Hons.) student at Dharmashastra National Law University, Jabalpur]
In India, international treaties are not immediately incorporated into domestic law. Under the “dualism” approach, separate legislation is necessary for India to execute treaty-based international law. Treaties, according to Indian courts, are part of public international law and thus are open to interpretation in conformity with international law principles. They have also acknowledged, to varying degrees, that the relevant principles for interpreting international agreements are contained in the Vienna Convention on the Law of Treaties (“VCLT”).
Insofar as India is not a signatory to VCLT, the adoption of articles 31-33 of treaty interpretation can be viewed as the application of customary international law. The International Court of Justice and investment tribunals have consistently regarded these articles as representing customary international law. Likewise, the Supreme Court has reaffirmed that VCLT embodies customary international law principles in the case of Ram Jethmalani v. Union of India. The Supreme Court has observed that the principles contained in articles 31-33 are widely recognized as reflecting customary international law on the interpretation of treaties and “provide a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also.”
India differs from other non-parties, such as the US, in its reluctance to explicitly reference VCLT for treaty interpretation. Substantive international law, like foreign law, is invoked where it is perceived to be supportive of constitutional rights. The courts have embraced the practice of seeing treaties as external aids to interpreting domestic law under article 51 jurisprudence. Conventions and treaties have been used as external aid in the interpretation of national legislation by Indian courts wherever possible. Domestic adjudication has made extensive use of substantive international law, although reference to international principles of treaty interpretation has been relegated to one area – the interpretation of Double Taxation Avoidance Agreements (“DTAAs”).
Interpretation of Tax Treaties: A ‘lex specialis’ Isolated from the Rest
VCLT is most explicitly introduced in the sphere of tax law in India. In DTAA cases, courts embrace articles 31 and 32, rather than disputing VCLT’s application. The Supreme Court decided in Azadi Bachao, a case involving treaty shopping and the India-Mauritius Tax Treaty, that:
“…the principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief is that treaties are negotiated and entered into at a political level and have several considerations as their bases.”
Articles 31 and 32 of VCLT appear to provide a broad framework for interpretation in the context of tax treaties. First, as stated in article 31 of VCLT, “A tax treaty is to be interpreted in good faith in accordance with the ordinary meaning given to the treaty in the context and in the light of its objects and purpose.” Second, in accordance with article 31(1), a tax treaty must be “interpreted as a whole,” which the courts have interpreted to mean that the treaty’s provisions must be read in harmony with one another. As with VCLT, there are exceptions to the general rule regarding ordinary meaning. These include, analogous to article 32(b), a rule allowing deviation from the plain meaning of the language where the context necessitates it. This allows for the avoidance of absurdities and promotes the interpretation of the treaty “ut res magis valeat quam pereat, i.e., to make it workable rather than redundant.” Third, where the basic purpose of the treaty may be compromised in relation to particular issues under consideration, a literal or formal interpretation must be avoided. Last but not least, if a tax treaty uses a term but does not define it and if the context of the treaty warrants it, the term may be assigned a meaning that is different from what it would mean under domestic law.
Recourse to Model Commentaries
The terms of the Commentaries can also be considered supplementary means of interpretation under article 32. However, it is important to note that such recourse is only available to confirm an interpretation that has already been reached by the court using the rules outlined in article 31, or in cases where the application of these rules leaves the meaning of the treaty obscure.
The treaties signed by India are neither entirely based on the UN model nor the OECD model. When it comes to tax treaties, India takes a two-pronged strategy. Certain provisions of Indian tax treaties are based on the OECD model language, while others are adopted from the UN model. VCLT provides a common minimum interpretative canon in this mixed situation where resorting to international meaning is nevertheless desirable. India is an OECD observer and uses a hybrid model based on the OECD Model Tax Convention on Income and Capital or the United Nations Model Convention, as well as the commentaries that accompany them that illustrate and interpret the provisions of the models.
Towards Adopting the Precept of Common Interpretation in India
DTAAs refer to agreements between two countries that aim to prevent the double taxation of non-residents. The main objective of these agreements is to ensure that individuals or entities that generate income in a foreign country are not taxed twice, i.e., in their country of origin and in the country where the income was generated. By signing a DTAA, two countries agree to provide relief from double taxation by allowing either a tax credit or an exemption. This helps to promote cross-border trade and investment by removing barriers to the movement of capital and people between countries. Additionally, DTAAs allocate tax claims equally between contracting states, which is not possible with unilateral interpretations.
Klaus Vogel proposed the method of ‘common interpretation’ in 1986 for interpreting DTAAs. The method suggests that treaties should be interpreted consistently by both countries to ensure the success of DTAAs. It is based on article 31(1) of VCLT, which requires DTAAs to be interpreted in light of their objects and purpose. By adopting a ‘common interpretation’ approach, DTAAs can be applied uniformly, promoting their effectiveness.
The availability of tax treaty benefits based on the most favored nation (“MFN”) clause has been a recurring matter of litigation in India. In Concentrix Services Netherlands B.V. vs. Income Tax Officer TDS (2021), the Delhi High Court had an opportunity to interpret the MFN clause of the tax treaty between India and the Netherlands (“the tax treaty”). The MFN clause in the tax treaty stipulates that if India enters into a treaty with an Organization for Economic Co-operation and Development (“OECD”) member country that provides for a more limited scope or a lower rate of taxation with regard to certain items of income such as dividends, interest, and others, the beneficial provisions would then apply to the tax treaty as well. The Dutch taxpayer company attempted to utilize the MFN clause to apply a lower rate of tax for dividends earned from its Indian subsidiary, citing the Indian tax treaties with Slovenia, Lithuania, and Colombia. However, the Revenue Department of India opposed the taxpayer company’s attempt, stating that the MFN clause did not apply in this situation. The Department noted that while the aforementioned countries are currently OECD member states, they were not members of the OECD when the relevant Indian tax treaties were signed.
The Court had to decide if the MFN clause of the tax treaty applies to a treaty made by India with a third country that later became an OECD member. By adopting the ‘common interpretation’ approach, the Court sided with the taxpayer, stating that the MFN clause should be observed at the time of application of the tax treaty and not when it was entered into with the third country. The Court based its decision on the intent of the other treaty partner i.e., a decree issued by the Kingdom of the Netherlands, which was deemed the best interpretative tool. This approach reflects the fundamental assumption underlying article 31(1) of VCLT which stresses the importance of interpreting treaties in a manner that establishes the common intention of the treaty parties.
The ruling by the Delhi High Court is a significant milestone in the interpretation of the MFN clause in tax treaties and marks a pioneering decision in India. The judgment sheds light on the nuanced application of the ‘common interpretation’ principle and the appropriate timing for evaluating the OECD status of the other country. Until further clarification or a contradictory ruling on the matter, this verdict should serve as a precedent.
Conclusion
The article sheds light on the adoption of ‘common interpretation’ by Indian Courts in DTAA matters. It explains that the foundation of this doctrine is rooted in Article 31(1) of VCLT, which requires DTAAs to be interpreted in light of their objects and purpose. Moreover, it highlights that although the Indian courts have made efforts to reconcile domestic laws with substantive international law through article 51 of the Constitution, the application of VCLT in treaty interpretation is primarily confined to cross-border tax matters in India. By harmonizing the interpretation of VCLT rules, the Indian judiciary could establish a counterpart to the harmonization of domestic and international law. To achieve this, the Supreme Court could look towards cross-border tax matters as a reference point and incorporate them into their mainstream (non-tax) jurisprudence.
– Shantanu Singh