Privileged & Confidential

INTERPRETATION OF TAX TREATIES

September 5, 2014

Presented by Krishan Malhotra Amarchand & Mangaldas & Suresh A. Shroff & Co.

Privileged & Confidential

❑ Old Concept – GATT 1947 ❑ Objectives ▪ No discriminatory treatment to a country signing treaty as compared to

third country which negotiates the treaty afterwards ▪ To ensure the extension of any benefits accorded subsequently to third

countries without renegotiation

Most  Favoured  Nation  (MFN)  Clause

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MFN

If MFN clause introduced as part of protocols or MOU - Is legally part of treaty and has binding forces?

2.

Article 31 of Vienna Convention of laws of treaties 3.

4.

MFN – not rule of general application but contained In tax treaty 1.

Ram Jethmalani vs Union of India (SC)

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India-France Treaty – Protocol

▪ “……If under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits 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 of scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.”

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Judgements

▪ DCIT vs ITC Ltd. 82 ITD 239 ITAT (Kolkata)

▪ Fee for technical services, restricted in other OECD countries after 1989

▪ Restricted meaning would be applicable in India – France Treaty (ISRO Satellite Centre – Karnataka HC)

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Contrary View

▪ Steria India [2014] 45 taxmann 281 AAR

▪ AAR held that:

o A protocol cannot be treated as same with provision contained in the treaty itself

o Restriction is only on rate & not make available clause

o A complex clause like “make available” cannot be imported in the treaty through protocol

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Conclusion

▪ Protocols/MOU are integral part of treaty ▪ To interpret the MFN clause in good faith ▪ Interpretation should not defeat the object of the treaty & MFN clause ▪ Need to distinguish between Protocols which are automatic and which require

executive action

Any violation of settled principles of treaty interpretation be avoided

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II. Undefined Expressions in Tax Treaty Article 3 of UN & OECD Model Convention –

“As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State………”

“Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the contest otherwise requires……….”

90(3) of the IT Act is pari materia of Article 3

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▪ To ensure that alternative meaning given in

domestic law is appropriate in context of the

treaty ▪ ‘Unless the context otherwise requires’

signifies to respect the overall scheme of the

treaty ▪ To ensure that domestic law meaning not to

have marked variance of international

commentaries

“Unless the context otherwise require”

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▪ Asia Satellite Telecommunications Co Ltd vs DIT Delhi H.C. held

that relaying of television signals in India not chargeable to tax as

royalty ▪ Amendment in 9 (i) (vi) through explanation 5 & explanation 6

retrospectively in 2012 ▪ Definition of royalty under tax treaties remain open issue

“Unless the context otherwise require”

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▪ Relying on Verizon Judgement ▪ Relied on Article 3 (2) of India US DTAA ▪ Definition of Royalty under the Act of India-US Treaty is same prior to

2012 ▪ Word ‘process’ not defined in treaty, relied upon Article 3 (2) of treaty &

applied explanation 6 of 9 (i) (vi).

VIACOM 18 Media (P) Ltd vs ACIT (Mumbai ITAT 2014)

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▪ Is approach followed in Viacom not aggressive? ▪ Is it not an attempt to unilaterally override DTAA? ▪ Does the context of the treaty require a meaning

different from domestic meaning? ▪ Significance of the words “unless the context

otherwise require”?

“Unless the context otherwise require”

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▪ True intention of the treaty vis-à-vis literal meaning. ▪ True intention should be respected. ▪ International interpretation, OECD commentaries to be seen. ▪ US treaty allows competent authorities to agree on meaning. ▪ Not to expand the scope of work

Conclusion

Both parties understand the treaty terms in same manner

Thank You

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