Navigating the international treaty interpretation maze

Treaty interpretation and the limits of domestic law

International tax disputes often turn not on what a treaty expressly says, but on what it does not say. The recent Huntsman Investment Netherlands BV v. ADIT decision concerning Article 13(5) of the India–Netherlands Double Taxation Avoidance Agreement provides a useful backdrop to examine this issue in the context of the newly introduced Section 159(7) of the Income-tax Act, 2025.

The dispute concerned whether gains arising from a share buy-back could fall within the definition of “corporate organisation, reorganisation, amalgamation, division or similar transaction”. The treaty does not define “reorganisation”. Article 3(2), therefore, becomes critical: where a treaty term is undefined, and unless the context otherwise requires, its meaning may be determined by reference to domestic law.

Traditionally, this involved a three-stage inquiry: 

• Does the treaty define the term? 

• If not, what meaning does the relevant domestic law assign to it? 

• And does the treaty context require a different meaning? 

Domestic law was therefore an important interpretive reference point, but not necessarily the final answer.

Section 159(7) now gives this process a statutory hierarchy. A treaty definition prevails. If the treaty is silent but the Income Tax Act defines the term, that statutory meaning applies. If neither does so, the provision moves successively to a central government notification, a central government enactment relating to taxes, and, finally, another central government law. These latter stages remain subject to the qualification that the context must not require otherwise, and the meaning must not be inconsistent with the Act or the treaty.

The fundamental question is temporal

What happens when the domestic definition did not exist when the treaty was negotiated, but is introduced (or materially altered) years later? Can a later domestic provision retrospectively determine the meaning of an undefined treaty term, thereby affecting the allocation of taxing rights agreed between two sovereign states?

For the notification and subsequent domestic-law stages, Section 159(7) expressly provides that the assigned meaning is deemed to have effect from the date on which the treaty came into force. The legislative explanation indicates this was intended to accommodate the different pace at which treaties and domestic tax laws evolve: treaties may remain unchanged for decades while domestic legislation is frequently amended.

This raises an important distinction between clarifying the domestic meaning of an undefined treaty term and changing the substantive bargain reflected in the treaty. The former is contemplated by Article 3(2); the latter potentially engages the treaty's text, context, and allocation of taxing rights.

This is where the safeguards in Section 159(7) assume significance. A domestic definition cannot be viewed in isolation merely because it appears later in the statutory hierarchy. The enquiry must still ask whether the treaty context requires otherwise, and whether the domestic meaning is consistent with the treaty.

Huntsman illustrates why this distinction matters. The case concerned the meaning of “reorganisation” in the specific context of a share buy-back under Article 13(5). The Delhi Tribunal ultimately held that the buy-back fell within the treaty provision, although there was a dissenting view. The larger issue is not merely whether a particular transaction constitutes a reorganisation, but how an undefined treaty expression should be interpreted when domestic law supplies, or subsequently changes, the relevant meaning.

Section 159(7) may be viewed as an attempt to bring greater certainty to Article 3(2), but it also creates a new interpretive frontier: the boundary between using domestic law to interpret a treaty and allowing domestic law to reshape the treaty's meaning retrospectively. That boundary is likely to become one of the most significant questions for Indian treaty jurisprudence under the Income-tax Act, 2025.

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Ashishkumar Bairagra has been a partner at M L Bhuwania and Co LLP since 2001. He specialises in international taxation, transfer pricing, valuation, due diligence, PE and VC funding, cross-border business structuring, inheritance structuring, compliance, and planning for HNIs with global incomes and assets.