The Mumbai Bench of the Income Tax Appellate Tribunal (‘ITAT’)^[1] has recently ruled on the interplay between the Multilateral Instrument (‘MLI’) and the India–Ireland Double Tax Avoidance Agreement (‘DTAA’), in the context of denial of treaty benefits to the taxpayer. The decision of the ITAT is in consonance with the dictum of the Supreme Court (‘SC’) rendered in the case of AO v. Nestle SA^[2], (‘Nestle SA’) and holds that the MLI will not automatically apply, unless it is expressly incorporated into India-Ireland DTAA through a separate notification issued under Section 90(1) of the IT Act.

The case before the ITAT concerned an Irish company leasing aircrafts to IndiGo. The Assessing Officer (‘AO’) in the Draft Assessment Order denied the India-Ireland treaty benefits to the taxpayer whilst invoking the ‘Principal Purpose Test’ (‘PPT’) as envisaged under Articles 6 and 7 of the MLI. The AO observed that the taxpayer was operating from Ireland with the sole intention of obtaining treaty benefits and hence, fell within the contours of Articles 6 and 7 of the MLI. The Dispute Resolution Panel (‘DRP’) upheld the reasoning of the AO, while relying on the ‘synthesised text’ of the India-Ireland DTAA, which contained modified text of the India-Ireland DTAA.

Aggrieved, the taxpayer preferred an appeal before the ITAT. The principal argument of the taxpayer was that the provisions of PPT, as contained under the MLI, could not be applied in its case sans a specific notification issued under Section 90(1) of the IT Act, incorporating MLI into the India–Ireland DTAA. In support of this argument, reliance was placed on the decision of the SC in the case of Nestle SA, wherein, the SC had categorically held that the amendments or protocols in the DTAA(s) would not be automatically enforceable/ applicable, unless the same were separately notified by the Government under Section 90(1) of the IT Act, incorporating such amendment/ protocols in the DTAA.

In the context of applicability of ‘most-favoured nation’ clause, as it existed in the protocol of India-France-Netherland DTAA, the SC in Nestle SA clarified that international treaties, including DTAA(s) and their protocols, do not automatically become part of the Indian law merely because India has signed or ratified them. The SC held that in terms of Article 253 of the Constitution of India read with Section 90 of the IT Act, a separate notification notifying DTAA(s) or incorporating such an amendment or protocol in the DTAA(s), is a mandatory precondition.

Applying this rationale and while condemning the inconsistent stands of the Revenue, the ITAT noted that while both the India–Ireland DTAA and the MLI had individually been notified, a specific notification incorporating the MLI into the India-Ireland DTAA had not been separately notified under Section 90 of the IT Act. In absence thereof, the Revenue’s recourse to the provisions of Articles 6 and 7 of the MLI to deny treaty benefits to the taxpayer was unwarranted. Lastly, the ITAT also clarified that the synthesised text, although a useful interpretative tool, has no binding legal effect, sans a notification under Section 90 of the IT Act.

The decision has two key implications. First, it confirms that the provisions of the MLI do not automatically override treaty benefit and second, it offers clarity and comfort to taxpayers that treaty protections remain intact until formally notified under Section 90 of the IT Act. The ITAT has reinforced the constitutional safeguard elucidated in Nestle SA ruling that international treaties may bind India externally, but they become part of the domestic law only when adopted through a notification under Section 90 of the IT Act. Thus, in terms of the ITAT judgement, unless and until the government issues a specific notification incorporating the PPT into the DTAA(s), the provisions of MLI cannot be invoked by the Revenue to deny treaty benefits to non-resident taxpayers!!

[1] Sky High Appeal XLIII Leasing Company Ltd. v. Assistant Commissioner of Income-tax, [2025] 177 taxmann.com 579 (Mumbai ITAT).

[2] AO v. Nestle SA, (2023) 458 ITR 756 (SC).