Role of Vienna Convention in Application and Interpretation of Tax Treaties - International Taxation - Income Tax

Role of Vienna Convention in Application and Interpretation of Tax Treaties The Vienna Convention on Law of Treaties provides the basic rules of interpretation of any international agreement (including a tax treaty). The principles engraved in Vienna Convention on Law of Treaties have been acknowledged and embraced by the Indian courts of law while pronouncing their ruling. Para 60 of the Supreme Court ruling in Ram Jethmalani Ors. v. Union of India Ors Writ Petition (Civil) 2011 (9) TMI 69 SC reads as follows Article 31, General Rule of Interpretation , of the Vienna Convention of the Law of Treaties, 1969 provides that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation, of Article 31 of the Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also . Therefore, it would be worthy to understand some of the Articles of the Vienna Convention of Law of Treaties which would help appreciate the manner of application and interpretation of tax treaties. Principles enunciated in the Vienna Convention on Law of Treaties Article No. Article Heading Principle enunciated 26 Pacta Sunt Servanda (in good faith) Every treaty in force is binding upon the parties and must be followed by them in good faith. 27 Internal law and observance of treaties A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. For instance, the parties to the treaty should not dishonour their international commitments with each other by retrospectively amending their domestic tax laws or by not abiding by the treaty terms. 28 Non-retroactivity of treaties Unless a different intention appears from the treaty or is otherwise established, treaty provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the date of the entry into force of the treaty with respect to that party. In other words, unless otherwise provided, treaties cannot have retrospective application 29 Territorial Scope of Treaties Unless a different intention appears from the treaty or is otherwise established, a treaty is binding upon each party in respect of its entire territory. 31 General Rule of Interpretation A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms thereof in the context and in the light of its object and purpose. This is a basic principle. It states that treaties should be interpreted by first giving the ordinary meaning to the language. It is only if the ordinary meaning is ambiguous, or leads to illogical results, that the purpose may be considered. The context for the purpose of interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexure Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related thereto. The following shall be taken into account , together with the context in that: Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; Any relevant rules of international law applicable to relation between the parties. A special meaning shall be given to a term if it is established that the parties so intended 32 Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31: leaves the meaning ambiguous or obscure; or leads to a result which is manifestly absurd or unreasonable. 33 Interpretation of Treaties Authenticated in two or more languages When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail. A version of the treaty in a language other than the one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree. The terms of the treaty are presumed to have the same meaning in each authentic text. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference in meaning which the application of Articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted. 34 General Rule regarding third states A treaty does not create either obligations or rights for a third State without its consent. 42 Validity and Continuance in force of treaties The validity of a treaty or of the consent of a State to be bound by a treaty may be impeached only through the application of the Convention. The termination of a treaty, its denunciation or the withdrawal of a party may take place only as a result of the application of the provisions of the treaty or of the Convention. The same rule applies to suspension of the operation of a treaty 60 Termination or Suspension of the operation of a treaty as a consequence of a breach A material breach of a bilateral treaty by one of the parties entitles the other to invoke the breach as a ground for terminating the treaty or suspending its operation in whole or in part. A material breach of a multilateral treaty by one of the parties entitles: the other parties by unanimous agreement to suspend the operation of the treaty in whole or in part or to terminate it either: in the relations amongst themselves and the defaulting State, or as between all the parties; a party specially affected by the breach to invoke it as a ground for suspending the operation of the treaty in whole or in part in the relations between itself and the defaulting State; any party other than the defaulting State to invoke the breach as a ground for suspending the operation of the treaty in whole or in part with respect to itself if the treaty is of such a character that a material breach of its provisions by one party radically changes the position of every other party with respect to further performance of its obligations under the treaty. A material breach of a treaty, for the purposes of this Article, consists in: a repudiation of the treaty not sanctioned by the Convention; or the violation of a provision essential to the accomplishment of the object or purpose of the treaty. The foregoing paragraphs are without prejudice to any provision in the treaty applicable in the event of a breach. 61 Supervening impossibility of performance A party may invoke the impossibility of performing provision of a treaty as a ground for terminating or withdrawing from it, if the impossibility results from the permanent disappearance or destruction of an object indispensable for the execution of the treaty. If the impossibility is temporary, it may be invoked only as a ground for suspending its operation. Impossibility of performance may not be invoked by a party as a ground for terminating, withdrawing from or suspending the operation of a treaty if the impossibility is the result of a breach by that party either of an obligation under the treaty or of any other international obligation owed to any other party thereto. 62 Fundamental change of circumstances A fundamental change of circumstances which has occurred with regard to those existing at the time of the conclusion of a treaty, and which was not foreseen by the parties, may not be invoked as a ground for terminating or withdrawing from the treaty unless the existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and the effect of the change is radically to transform the extent of obligations still to be performed under the treaty. A fundamental change of circumstances may not be invoked as a ground for terminating or withdrawing from a treaty if the treaty establishes a boundary; or if the fundamental change is the result of a breach by the party invoking it either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty. If, under the foregoing paragraphs, a party may invoke a fundamental change of circumstances as a ground for terminating or withdrawing from a treaty it may also invoke the change as a ground for suspending its operation. 64 Emergence of new peremptory norm of general international law If a new peremptory norm of general international law emerges, any existing treaty which is in conflict with that norm becomes void and stands terminated