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Position of "Most-Favoured-Nation" principle today in India

The Economic Times on 23rd October 2023, opined that the MNCs in India might be facing a retrospective tax demand of up to 11000 Crores. Similarly, Foreign Portfolio Investors from Netherlands would now be subjected to a 10% withholding tax as opposed to 5%, thereby reducing this ROI from India. Added to this, are further two possibilities, i.e. Income tax authorities, reopening cases of past AYs and that too is uncertain, up to when it would be computed. Further, would other contracting states provide any credit to relieve the effect of the double taxation, that may arise?

With the uproar of the recent ruling of the Hon’ble Apex Court in Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi v. Nestle SA on 19th October 2023, most have started to ponder whether such a controversial decision by the Hon’ble Supreme Court would set the scales of economies for international trade backward, in light of the retrospective tax claims, ensuing interests and the cascading impact it may have on the business cash flows.


In 1989, India and Netherlands entered into a DTAA, and subsequently in 2012, the countries signed a protocol featuring a MFN Clause. Subsequently, in 2013, India and Lithuania entered into a DTAA. Interestingly Lithuania was not a member of OECD till 2018. Now, as per the MFN clause of India – Netherlands, the tax treatment extended by India to Lithuania as per the India-Lithuania DTAA, shall also be extended to the residents of Netherlands.

Similarly, India has entered into DTAA and MFN treatment protocol clauses with various nations. While these agreements have been in existence for decades, disputes arose recently to address the issues from which date the benefits of MFN treatment could be claimed by the residents of the country with whom India has entered into a DTAA. But what exactly is the controversy that led to these batch appeals before the Hon’ble Supreme Court?

Let us take an example, in a team of 3 members, member A is given a salary of Rs. 100 with a promise that if any other member is given a higher salary or better terms, the same treatment would be extended to member A. Now the short controversy is, would the employee take this treatment on its own or would it have to wait till the employer implements it? Therefore, the controversy before the Hon’ble Supreme Court in the batch petitions was all about the interpretation of “notification”. Another pertinent issue dealt with by the Hon’ble Supreme Court was whether there is any right to invoke the MFN clause with respect to provisions of the third country with which India has entered into a DTAA, which was not a member at the time of entering into such DTAA.

Before the batch petitions were heard in length before the Hon’ble Supreme Court, the Hon’ble Delhi High Court in the cases of Steria India ([2016] 72 1(Delhi)) and Concentrix Services ([2021] 127 43 (Delhi)) laid down certain principles, inter alia, when a DTAA is notified, automatically, the MFN protocol which is an integral part of the DTAA becomes applicable, and as such there is no need for a separate notification, and that the MFN clause is triggered automatically when a third party becomes an OECD member after the MFN clause containing DTAA is signed with a second country.


The Hon’ble Supreme Court, focusing largely on the interpretation of the term “is” rejected the understanding of the Delhi High Court i.e., “the word ‘is’ is both autological and heterological” and held that the term “is” was “fact dependent”. As such the Hon’ble Court concluded that the term “is: cannot be interpreted in a standalone way and has to be read in the manner in which the treaty mentions it.

Ideally, the Hon’ble Apex Court propounded that the benefit of a more restrictive scope as provided in a treaty with a third party would only be available if such a treaty is entered into with an OECD member and thus MFN clause would not be triggered unless the third-party country is a member of OECD, at the time of second country concluding its treaty with India.

Now, coming to the automatic triggering of the MFN clause, the Apex Court ruled that in order to give effect to DTAA, a notification under Section 90 of the Income Tax Act, 1961 is mandatory. The Hon’ble Court opined that, unlike other countries, mere signing or ratification of a treaty does not ipso facto become enforceable in India, where the power to legislate such treaties vests exclusively with the Parliament by virtue of Article 253 of the Constitution of India. Relying on the judgment of State of Gujarat v. Vora Fiddali Badruddin Mithibarwala, 1964 (6) SCR 461, the Hon’ble Court reiterated and emphasized the exclusive authority of the Parliament to either give effect or refuse to perform such treaties, legislate upon such treaties and as such, India’s entering into a treaty or protocol does not result in the automatic enforceability of such treaties before the courts of law in India and in order for such treaties and protocols to confer their appropriate rights, an appropriate notification has to be issued in terms of Section 90(1) of the Income Tax Act, 1961.


Vide this judgment, the Hon’ble Court has radically moved 10 paces ahead and altered the course of Tax Treaty interpretation, as has been understood by the lower courts till date.

The decision of the Hon’ble Court in holding that the MFN clause would be subject to notification has opened a whole boiling point of uncertainties, i.e., it could mean that the MFN clause either may never be separately notified, notified in part, or at a much later point in time. It has altered the trite principle of law “A bilateral agreement cannot be watered down by a unilateral act” as now the applicability of an internationally recognized beneficial provision, is completely subject to a sovereign notification.

This judgment further opens up the gateway of past tax differentials and interest being levied. It could be rightly said, that while the Parliament’s authority has been crystalized, the Hon’ble Court has failed to give due credence that such a judgment, will lead to adverse revenue implications for developing countries that are importers of capital and need to favor the exporter of capital. The Supreme Court has failed to appreciate that the implications of this judgement would befall global recipients who will contend with a higher rate of taxation on their incomes. Swiss, French, and Dutch Companies, operating in India, will now have to re-strategize their entire cost repatriation and ROI analysis, as now higher rate of tax incidence would have to be factored in.

The entire judgment is an interesting pot of controversial landscapes and it has to be seen how the CBDT deals with the post-judgment notifications.

The above article is authored by Ms. Yashodhara Burmon Roy, Senior Associate. The article was originally published by AXFAIT (



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