The recent order of the Mumbai Tribunal in the case of Sky High Leasing Limited[1] has the effect of keeping on hold the implementation of BEPS project in India. Nuances related to this Tribunal order are analysed in this article.

Law related to implementation of tax treaties in India

Section 90(1) of the Income Tax Act, 1961 (the Act) authorises the Government to enter into tax treaties. This power can be correlated to Article 73 of the Indian Constitution which authorises Union of India to enter into international treaties.

Article 253 provides that the Parliament has power to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body. Section 90(1) provides that the Central Government may by notification in the Official Gazette, make such provisions as may be necessary for implementing the double tax avoidance agreement. While the word used is “may”, it is seen as a necessity to assimilate the tax treaties in the domestic law. This is linked to Article 253.   

The Supreme Court has in the case of AO v. Nestle SA [TS-616-SC-2023] summarised various judicial precedents related to international treaties as follows:

Ratio laid and rationale adopted by the Supreme Court in Nestle SA

Given that the Mumbai Tribunal’s order is based on the Supreme Courts case in the case of Nestle SA, it is relevant to take note of the rationale and ratio of the Supreme Court judgment.

The dispute in this case pertained to benefit of MFN cause contained in the tax treaties signed by India with Netherlands, France and Switzerland. The tax payers had taken a view that the MFNs in these treaties were “self-operative” i.e. tax residents of these countries were automatically entitled to a more favourable treatment offered to tax residents of any other OECD Country at a subsequent stage.  The Supreme Court decided in favour of the revenue on two grounds:

• Treaty practice followed by India did not support the “self-operative” interpretation, although the text of the MFN may lead to such an interpretation. A tax treaty cannot be interpreted like a law and the Indian treaty practice need to be considered.
• The Indian law requires the international tax treaties to be assimilated in the domestic law which does not happen until notification is issued under section 90.

The relevant extracts of the Supreme Court judgment are reproduced:

The requirement of notification in terms of section 90(1) is explained in the preceding para explaining Law related to implementation of tax treaties in India.  

It is interesting to note that section 90(2) does not refer to “notified agreement”. It simply says “Where the Central Government has entered to an agreement……under sub-section (1)”.

Co-existence of tax treaties, MLI and synthesised text

Negotiation of bilateral tax treaties is a fairly long process. About 3500 or more bilateral tax treaties were estimated to be in existence when the BEPS project was executed. If the outcome of the BEPS project is to be adopted in the existing tax treaties following bilateral negotiations, several Taxsutra current readers may have retired by the time all the treaties are amended (i.e. it would take unreasonably long period). This resulted in adoption of innovative document i.e. Multilaeral Instrument (MLI). The key purpose sought to be achieved by MLI was to adopt MLI provisions in the tax treaties in one go. Further, the treaties are bilateral and hence a provision can be adopted only of both the parties agree for a particular provision.

It was agreed by the members of the Inclusive Framework that the text of the existing tax treaties would not be amended. However, the existing tax treaty and MLI provisions (taking into consideration the matching process) both will co-exist. The tax treaty shall be read alongside the MLI provisions.

Considering the complexities of the matching process, as a simplification measure, synthesised text emerged. It was not obligatory for the members of the Inclusive Framework to issue synthesised test. Further, synthesised text can be prepared by:

• both the treaty partners jointly,
• unilaterally by one of the treaty partners with or without consulting the other treaty partner or
• any other party or service provider like Taxsutra or other publisher or other author

In either case, the synthesised texts are not legally binding document irrespective of whether the preparer is revenue officers or private parties. The synthesised texts prepared by the revenue officers categorically state that MLI is not a binding legal document. The original tax treaty and MLI are the only legally binding documents. There are also instances where the revenue officers adopt different interpretations while preparing synthesised text (e.g. synthesised text of India-UK tax treaty takes note of the differing opinions). 

Order of the Mumbai Tribunal 

The tax authorities denied benefit of India-Ireland tax treaties to several Ireland based companies by invoking PPT provisions (Article 7 of the MLI). The Tribunal decided the issue in favour of the tax payers on the basis that a specific notification, adopting Article 6 and 7 of the MLI in India-Ireland tax treaty, was not issued by the revenue. Reliance was placed on the Supreme Court ruling in the case of Nestle SA. Some observations of the Tribunal are reproduced / summarised hereunder.

• In our considered view, the factual matrix of the present case bears a close parallel to that examined by the Hon’ble Supreme Court in Nestlé SA (supra)………………. The pivotal question, however, was not the mere existence of notifications in respect of both instruments, but rather whether the consequential modification of the earlier DTAA, brought about by virtue of the later multilateral instrument, had itself been separately notified for the purposes of domestic application. On the material available on record, it is expressly admitted that although both the India–Ireland DTAA and the MLI have been notified, “the consequence/impact of the MLI on the India–Ireland DTAA is not admittedly and separately notified.” [para 40]
• The Revenue has argued that, since the MLI has been duly notified and the India–Ireland DTAA is a “Covered Tax Agreement”, Articles 6 and 7 (i.e., the PPT suite) automatically apply. With respect, this contention cannot be reconciled with the constitutional and statutory mandate articulated by the Hon’ble Supreme Court in Nestlé SA. [para 42]
• ……The contradiction is plain: the Revenue recognises that the MLI modifies tax treaties, yet it sidesteps the very legal requirement that Nestlé SA describes as an indispensable precondition, namely, a separate Section 90(1) notification incorporating those treaty modifications into Indian law. [para 45]
• Having thus resolved the threshold question in favour of the assessee, it bears reiteration that this conclusion is not reached on a technicality divorced from substance, but rests on the very constitutional and statutory architecture governing how international agreements enter the domestic legal order. The Ho’ble Supreme Court in Nestle SA (supra) did not propound an abstract procedural nicety; it articulated a substantive safeguard that treaty modifications altering existing rights or liabilities cannot be judicially enforced until procedure is followed in line with Section 90(1) of the Act. [para 48]
• ….Without a domestic notification that identifies the exact contours of the modification to a given DTAA, there is a real risk that an Indian court or authority may apply an MLI provision in a form or scope that was never domestically assented to. Section 90(1) operates as a bulwark against that risk, ensuring that only those changes consciously adopted into Indian law acquire binding force. [para 49]
• The Department’s suggestion that the MLI, once notified in general terms, becomes immediately self-executing vis-à-vis all covered agreements, would in effect render otiose the careful statutory scheme of Section 90(1). That interpretation would also run counter to the binding pronouncement in Nestle SA, which squarely holds that each modification with the effect of altering existing law must itself be the subject of a distinct notification. [Para 51].  

Analysis

The following two interpretations can be analysed:

Interpretation 1

The Government is required to issue a separate notification for each tax treaty as held by the Mumbai Tribunal.

Interpretation 2

Notification no. SP. 2887(E) [Notification no. 57/2019/F. No. 500/71/2015-FTD-I], dated 9-8-2019 [ the MLI Notification] fulfils the necessary constitutional and legal requirements under the India law to assimilate MLI provisions in the Indian tax treaties and separate notifications for each tax treaty is not required.

The MLI Notifications provides as follows:

“Now, therefore, in exercise of the powers conferred by sub-section (1) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that the provisions of the said Convention shall be given effect to in the Union of India, in accordance with India's Position under the said Convention, as set out in the Annexure hereto.”

Arguments in favour of Interpretation 1

• The arguments adopted by the Mumbai Tribunal reproduced in the above paragraph.
• Determination of whether and the extent to which the Indian tax treaties get modified due to MLI is a complex process. Further, MLI is an “open offer” and the Indian tax treaties may get modified at a future date when the offer is accepted by treaty partner. The government must provide a clear law to the citizens and it can not be left open for the citizens as well as the revenue officers to do the complex “matching process” and struggle to identify modification to the treaties. While synthesised text is released, it comes with a big caveat that its not a binding legal document. This issue can be addressed only by notifying specific consequential changes to each tax treaty.

Arguments in favour of Interpretation 2

The MLI Notification is in sufficient compliance with the Indian legal system which is explained by the Supreme Court in the case of Nestle SA. The Indian legal system (i.e. the constitutional and statutory architecture governing how international agreements enter the domestic legal order ) requires that the document amending the tax treaties is notified by the government in terms of section 90(1). The comparison with Nestle SA is tabulated.

There is no document other than MLI signed by the government and hence there is nothing else to notify. 

The issue before the Supreme Court did not involve modification of several tax treaty by a single instrument like MLI and to that extent the issue addressed by the Supreme Court in the case of Nestle SA is not comparable. The Supreme Court has held that to assimilate changes in the original tax treaty a notification u/s 90(1) is required and that requirement is met in the case of MLI.

Section 90(1) does not require a specific notification for each tax treaty in case of multilateral changes. Section 90 also does not require a notification giving consequential amendment to the tax treaty. The manner in which it should be issued and how detailed the notification should be, is a prerogative of the government and the notification issued need not necessarily be what is most convenient to the tax payers. Insisting that section 90(1) can be said to have been complied only by way of listing specific amendments to the tax treaties may be seen as propounding an abstract procedural nicety.

A typical amending protocol to a tax treaty replaces a particular existing provision of the treaty by a new provision as agreed by the treaty partners. However, this is not the case with MLI. What is agreed by Inclusive Framework is that MLI is to be read “alongside” the existing tax treaties. Thus, it is not contemplated and may not be possible legally as per the global agreement to issue a document giving “consequential amendments” as upheld by the Tribunal.

The Supreme Court has placed reliance on India’s “treaty practice” of issuing amending protocol. However, it should be noted that it is in the context of bilateral treaties containing MFN. The “treaty practice” referred to by the Supreme Court is a situation where the MFN in the Indian treaties is not allowed treated as “self-operating” by India. Although the text of MFN may suggest an agreement to give additional benefit to the old treaty partner based on subsequent treaty with another country, in “practice” India exchanges letters (or perhaps even renegotiates) with the old treaty partner and based on that notifies amending protocol. This “practice” as such is not relevant as the government has immediately after MLI (when practical) issued the MLI Notification. The speed dating prior to MLI and MLI positions are effective negotiations between the parties and MLI’s effect is comparable to the amending protocol (although the text of the treaty is not amended due to MLI).

The issue before Supreme Court did not pertain to MLI type instrument which impacts several tax treaties. The requirement of “separate notification” is not with respect to a situation involving several tax treaties and each treaty requiring “separate notification”. The “separate notification” in the Supreme Court judgment is “separate” from the original MFN clause or it is “separate” / “different” from the original notification through with the tax treaty was assimilated in the tax treaty. 

As analysed by the Supreme Court in Nestle SA, the executives of the government have the power to sign international tax treaties, but these treaties must be accepted by parliament. If not accepted by the parliament, such treaty does not form part of the Indian law and do not impact rights of the citizens. Notification in terms of section 90(1) is treated as approval by the parliament for this purpose. The MLI signed by the executive is also approved by the parliament as notification is issued in terms of section 90(1). It is for the government to decide what form / type of notification to be issued.

The main purpose sought to be achieved by the MLI is to modify several tax treaties quickly. If the government must issue more than 90 detailed notifications (i.e. separate consequential notification for each tax treaty), it would defeat the main objective of the MLI. Thus, what is relevant is the substance of the notification (i.e. assimilation of MLI in to the domestic law / tax treaties) as against the form i.e. separate notification for each treaty.  

India has also entered into another multilateral agreement namely “Agreement among the governments of SAARC member states for avoidance of double taxation and mutual administrative assistance in tax matters” in terms of section 90 of the Act. This multilateral agreement is signed by India, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka. Although, there are six treaty partners in this agreement, the government did not issue six separate notifications. Only one single Notification no. 3/2011 [SO 34(E)]-FTD-II [F.NO. 500/96/97-FTD-II], DATED 10-1-2011 is thought appropriate to assimilate this in the domestic law. This may be treated as India’s treaty practice as regards multilateral agreements. 

Conclusion

The Mumbai Tribunal has adopted a beneficial interpretation and Interpretation 1 is a better approach. However, Interpretation 2 is also backed by reasonable arguments. It would be interesting to see the strategy which will be adopted by the government now. Further, litigation on the issue may take longer and there could be multiple cases on this issue in the times to come. It may not be appropriate for the government to keep on hold implementation of BEPS project by not adopting MLI provisions in the tax treaties and not invoking PPT and other anti-abuse provisions. Issuance of detailed separate notifications for all the tax treaties can take long, although this can be expedited selectively taking into consideration matching. Further, if separate notifications are issued, the question would be whether the government would make it effective retrospectively or it will have prospective effect as it done for other amending protocols.

*** Author is a Chartered Accountant and views expressed are personal views of the author.

[1] ITA No. 1122/Mum/2025 dated August 13, 2025. Appeals of several other tax payers were clubbed together by the Tribunal. [TS-1085-ITAT-2025(Mum)]