Supreme Court's judgment in the Nestle SA case
The Supreme Court held that to give effect to the MFN provision in the DTAA, notification under Section 90(1) of the Income Tax Act is necessary and mandatory.
The Court advocated the doctrine of dualism wherein international law is not enforceable domestically till it is transformed into municipal law through enabling legislation.
This principle has been laid down in cases such as PUCL vs India, Vishakha vs State of Rajasthan, and Puttaswamy vs Union of India.
The premise in these cases was the ‘presumption of compatibility’ or ‘presumption of consistency’ between domestic and international law.
This presumption can be rebutted only if a domestic law explicitly contravenes international law.
This approach ensures that progressive international law is given effect by the courts to protect the rights of citizens and persons even if the legislature and the executive have not acted to transform it into domestic law for whatever the reason.
Thus, international law is not just an interpretative tool.
This decision is a setback to the progressive judicial journey unleashed by cases such as Vishakha to take international law seriously.
If India had issued a notification that expressly went against the MFN provision in some of the DTAAs, one could have plausibly argued that there is an inconsistency between domestic and international law.
The Court’s interpretation allows the executive to undo its international law obligations by not issuing the relevant notifications domestically.
This judgment has once again proved the adage that the Supreme Court is supreme because it is final, not because it is infallible.
Concerns about the freeze in treaty provisions
India’s bilateral DTAAs with the Netherlands, France, and Switzerland require imposing a 10% withholding tax .
These DTAAs also contain an MFN provision.
Thus, if India extends a preferential tax treatment to any third country “which is a member of the OECD”.
The same treatment should be accorded to the Netherlands, France, and Switzerland under their respective DTAAs.
India’s DTAAs with Slovenia, Colombia, and Lithuania have a lower withholding tax requirement of 5%.
When the matter initially came before the Delhi High Court, it held that under the MFN provision, the preferential tax in, say, the India-Slovenia DTAA should extend to the India-Netherlands DTAA.
However, the Supreme Court overruled this, holding that when the India-Netherlands DTAA was signed, Slovenia was not an OECD member.
Thus, the benefits given to Slovenia, which became an OECD member later, do not apply to the India-Netherlands DTAA.
This ruling will impose a tax burden estimated to be ₹11,000 crore on foreign investors. It may also lead to opening past cases.
This reasoning is specious because it freezes the provisions of a treaty in time.
There is nothing in the text of the India-Netherlands DTAA, for example, to prove that the words “is a member of the OECD” are restricted to countries that were members on the day the treaty was signed.
It is puzzling that the top court used domestic interpretative techniques to interpret a term in an international treaty.
MFN in a treaty ensures that future benefits given to a third country by one of the treaty-signing countries become automatically available to its treaty partners.
The doctrine of dualism
In international law, dualism is the doctrine that international law and domestic law are separate and distinct legal systems.
Under dualism, international law does not automatically become part of domestic law unless it is incorporated into domestic law through a process of transformation.
This process of transformation typically involves legislation by the state legislature or a decree by the executive branch.
Dualism is contrasted with monism, the doctrine that international law and domestic law form a single legal system.
Under monism, international law automatically becomes part of domestic law upon ratification of a treaty or the adoption of a customary international norm.
Dualism is the predominant approach in common law countries, such as the United States, the United Kingdom, and Canada.
In civil law countries, such as France and Germany, the approach is more mixed, with some elements of both dualism and monism.
The potential impact on India's international obligations.
India's dualist approach to international law could have several potential impacts on the country's international obligations.
On the one hand, dualism could make it more difficult for India to comply with its international obligations.
This is because the government must take specific steps to. incorporate international law into domestic law before it can be enforced.
As a result, there may be a lag time between the adoption of an international treaty or the emergence of a customary international norm and its implementation in India.
Dualism could also give India more leeway in interpreting and applying international law.
This is because the government has some discretion in deciding how to incorporate international law into domestic law.
As a result, India may be able to interpret international law in a way that is more consistent with its own national interests.
Overall, the potential impact of India's dualist approach to international law is complex and uncertain.
Dualism could make it more difficult for individuals and businesses to enforce their rights under international law in Indian courts.
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