DTAA & MFN | Analysis of Supreme Court’s Judgment in Nestle SA

Table of Contents

1. Most Favoured Nation Clause
2. Treaties with MFN Clause
3. What is the Controversy?
4. Position Before the Judgment
5. Ratio of Supreme Court Judgment
6. Impact Analysis

1. Most Favoured Nation Clause

• The MFN Clause in a DTAA (‘subject DTAA’) is a provision that ensures that a contracting state receives the same treatment that the other contracting state offers to any third state.
• If other contracting state provides a lower tax rate or other favourable tax treatment to a third state, the contracting state must receive the same treatment, provided that the taxpayer meets the relevant conditions.
• The purpose of the MFN clause is to promote non-discrimination and ensure that taxpayers are not disadvantaged based on their country of residence.

2. Treaties with MFN Clause

• India – Belgium
• India – Bulgaria
• India – Chile
• India – Finland
• India – France
• India – Hungary
• India – Nepal
• India – Netherlands
• India – Philippines
• India – Russia
• India – Spain
• India – Sweden
• India – Swiss Confederation

3. What is the Controversy?

• India and the Netherlands entered into a DTAA in 1989. Subsequently, both countries signed a protocol featuring an MFN clause in 2012.
• India later signed a DTAA with Lithuania in 2013. At the time of this agreement, Lithuania did not hold OECD membership. It subsequently attained OECD membership status in 2018.
• Under the MFN Clause, the favourable tax treatment that India offers to residents of Lithuania, as per the terms of the Lithuania DTAA, can be extended to residents of the Netherlands.
• The crux of the matter revolves around whether India is obligated to issue a notification to amend the India-Netherlands DTAA to incorporate the new provisions.
• Furthermore, there is a question regarding the effective date for granting this favourable treatment—either from the date the DTAA was initially signed with Lithuania (2013) or from the date when Lithuania became an OECD member (2018).

4. Position Before the Judgment

Previous Position

In the case of Steria India ([2016] 72 taxmann.com 1 (Delhi)) and Concentrix Services ([2021] 127 taxmann.com 43 (Delhi)), the Delhi High Court laid down the following principles:

• When a DTAA is notified, the protocol, which is an integral part of that DTAA, automatically becomes applicable.
• When the protocol contains an MFN Clause or the principle of parity, there is no need for a separate notification to incorporate the beneficial provisions of the DTAA signed with the third state.
• The MFN Clause is triggered automatically when the third country becomes an OECD member after signing the subject DTAA with the second country.

5. Ratio of Supreme Court Judgment

Ratio held in [2023] 155 taxmann.com 384 (SC)

• Mandatory to notify: The Supreme Court affirmed that a notification under Section 90(1) is necessary and mandatory. It is a condition that must be fulfilled for a court, authority, or tribunal to give effect to a DTAA or any protocol that alters its terms and conditions, thus affecting the existing provisions of law.
• No automatic application: The Court emphasized that merely because a provision in a DTAA or Protocol with one nation requires the same treatment in a specific matter, subsequent to its initial signing when another nation receives preferential treatment, this does not automatically lead to the integration of such provision to extend the same benefit in the context of the DTAA of the first nation. In such a scenario, the terms of the earlier DTAA need to be amended through a separate notification under Section 90.
• Relevant date: To claim the benefit of the MFN clause, based on the DTAA between India and the third state that is an OECD member, the relevant date is the date when the treaty was entered into with India, not a later date when that country becomes an OECD member.

6. Impact Analysis

• Impact on pending matters
• Impact on the concluded assessments
• Impact on lower withholding certificates issued by the department
• Potential reciprocating action by the treaty partner countries