International Tax

DIT V. New Skies Satellite BV [ITA 473/2012, 474/2012, 500/2012 & 244/2014]

The Hon’ble High Court of New Delhi held that any amendment made in the domestic Income Tax Law does not impact on the definition of the similar term in the double tax avoidance agreement (‘DTAA’). The high court while considering whether by a unilateral amendment in the Income Tax Act, impact an interpretation of the same term in the DTAA and whether by merely terming an amendment as ‘clarificatory’ and making it retrospective infact renders it retrospectively valid in law, held that any changes made in the definitions of a term in the domestic law does not override the definition of that term in the DTAA. The court held that the finalization of a DTAA is an effort of long negotiations between the governments of two contracting states and any change in the definition contained therein shall require approval of the governments of both the contracting states. The court cited the ruling by the hon’ble Supreme Court in the case of Union of India v.Azadi Bachao Andolan [263 ITR 706 (SC)] “it takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers”.

Further, the court also stated that the Vienna Convention of the Laws of Treaties, 1969 provides that the amendment to the treaty must be bought about by agreement between the parties and unilateral amendments to treaties are therefore categorically prohibited.

Also in the case of Commissioner of Income Tax v VR. S.RM. Firms Ors [1994] 208 ITR 400 (Mad), the Madras High Court has held that “tax treaties are…… considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries”.

Though DTAAs does not abstain on reference to the domestic laws, however, the treaties create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. In case of the former the inference has to be drawn on to the meaning of the term as defined in the DTAA. However, in case of the later the reference needs to be drawn from the interpretation of that term in the domestic laws of the contracting state.

Where there does exist a definition of a term within the DTAA, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA and the ultimate taxability of the income under the agreement. That is to say that the domestic law remains static for the purposes of the DTAA.


The court therefore concluded that the amendments made by the Finance Act 2012 does not affect Article 12 of the DTAA and that the determinative interpretation given to the word ‘royalty’ in Asia Satellite [2011] 332 ITR 340 (Del) will continue to hold the field for the purpose of assessment years preceding the Finance Act 2012 and in all the cases where a DTAA exists. 

Posted on: 12-02-2016