Notification is Needed to Apply MFN Clause; No Benefit If Country Joins OECD Post Signing of First Treaty | SC

Case Details: Assessing Officer v. Nestle SA - [2023] 155 taxmann.com 384 (SC)

Judiciary and Counsel Details

• • S. Ravindra Bhat, J.
  • Additional Solicitor General, Shri N. Venkatraman, for the Appellant.
  • Poros Kaka, P. Chidambaram, S. Ganesh & Percy Pardiwala, learned senior counsel; Lovkesh Sawhney and Mukesh Bhutani, learned counsel, for the Respondent.

Facts of the Case

The issue before the Supreme Court was:

“Can the MFN clause be invoked when India’s DTAA partner was not an OECD member when the agreement was made? And is the MFN clause automatic or requires a notification to come into effect?”

Supreme Court Held

The Supreme Court held as under:

The word ‘is’ appearing in Clause IV(2) of the India-Netherlands DTAA need to be interpreted correctly. The clause is quoted below:

“If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should…………….”

The expression “is” has a present signification and derives meaning from the context. The conclusion is that when a third-party country enters into DTAA with India, it should be a member of the OECD, for the earlier treaty beneficiary to claim parity.

The treaty practices of Switzerland, Netherlands, and France are influenced by their unique constitutional and legal systems. In India, when a third state joins the OECD after signing a Double Taxation Avoidance Agreement (DTAA), India must communicate and accept the beneficial effect through a notification under Section 90, with prior negotiation and communication.

Therefore, the essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined.

If a DTAA or Protocol provision with one nation mandates equal treatment for a specific matter, even after another nation (part of OECD) receives preferential treatment. In that case, it doesn’t automatically apply the same benefit to the DTAA of the first nation that has an agreement with India. In this case, the terms of the earlier DTAA need a separate amendment through a notification under Section 90.

Accordingly, for a court, authority, or tribunal to enforce a DTAA or any protocol that alters existing legal provisions, a notification under Section 90(1) is essential and obligatory.