Supreme Court holds that Tax Treaty MFN Clauses not triggered unless specific notification is issued


Supreme Court holds that Tax Treaty MFN Clauses not triggered unless specific notification is issued



Assessing Officer Circle (International Taxation) Vs Nestle SA (Supreme Court) Civil Appeal No(S). 1420 of 2023


  1. Hon Supreme Court has issued a judgment on the application of the Most Favored Nation (MFN) clauses in India’s tax treaties. In particular, the judgment concerns a batch of appeals to orders of the Delhi High Court involving the interpretation of the MFN clauses contained in India’s tax treaties with countries that are members of the OECD.
  1. India in 1998 had signed a tax treaty with the Netherlands, where a withholding tax of 10 per cent was allowed.
  1. It later entered into treaties with Slovenia, Lithuania, and Colombia where it agreed to a similar beneficial rate of 5 per cent on dividend income if the recipient company held 10 per cent or more of the share capital in the Indian company.
  1. Slovenia, Lithuania, and Colombia later became members of the OECD. Tax authorities sought to apply a 10 per cent rate on the dividend income of companies from the Netherlands, Switzerland, and France.
  1. These companies argued that the lower rate of 5 per cent available to companies under the tax treaties with the countries of Slovenia, Lithuania and Colombia must also be applicable to them as all were members of the OECD.

Hon High Court held that:

* MFN clauses are triggered automatically when the conditions of the treaty are satisfied, without the need for further notification; and

* MFN clauses can be triggered by India’s tax treaties with other OECD member countries even when the relevant country was not an OECD member at the time the relevant treaty was signed.

Note: Circular No. 3/2022 of 3 February 2022 states that notwithstanding the clarification on conditions for MFN clauses, where in the case of a taxpayer there is any decision by any court on this issue favorable to such taxpayer, the Circular will not affect the implementation of the court order in such case.

Hon SC held as below:

  1. A preferential treatment given to a country under a double taxation avoidance agreement did not automatically get extended to other member countries unless the earlier treaty with them was amended.
  1. Section 90(1) notification is necessary and a mandatory condition for courts, authorities, or tribunals to enforce a DTAA or any protocol modifying its terms, thereby altering existing provisions of law.
  1. The interpretation of the term “is” is of present significance. Therefore, to claim the benefit of a “same treatment” clause based on the entry of a DTAA with India, the relevant date is the DTAA’s entry into force with India, not any subsequent date when the other nation becomes an OECD member.
  1. A 2021 Delhi High Court ruling that allowed  Nestle SA, Concentrix Services, Steria and others a concessional withholding tax rate of 5 per cent on dividend income from their Indian arms, is set aside.