[Opinion] Supreme Court Decision of Most Favoured Nation Clause

Vivek Raju P – [2023] 155 taxmann.com 655 (Article)

In a landmark judgment, the Division Bench of the Hon’ble Supreme Court (SC) on 19 October 2023 in the case of Nestle SA, ruled in favour of the Revenue certain aspects related to the Most Favoured Nation (MFN) clause in the tax treaties. This will also alter the way we are used to interpreting tax treaties. While the decision provides clarity on the application of this clause, the retrospective impact of this judgment may have considerable implications of assessees who have obtained treaty benefits in the past.

Most Favoured Nation (MFN)

The SC has examined the MFN clauses of India – Netherlands, India – France and India – Switzerland treaties. It primarily clarified points related to

1. The need for a notification u/s. 90(1) of the Income Tax Act 1961 (the Act) for availing the benefit of MFN and to give effect to the treaty or its protocol changing the terms and conditions that alter the existing provisions of the law.
2. The relevant date for another state to be a member of OECD.

MFN clauses are not uncommon in tax treaties, through this clause one State A obligates to the other treaty partner State B, that it would offer the same treatment (more favourable) than what is agreed in the treaty, if any other State C is offered more favourable treatment in another treaty, both State B and State C being OECD members. The intention is that all OECD members be given similar treatment in their treaties with the same state, something like an anti-discrimination clause. Such favourable treatment could be of with holding tax rates, scope of income, definitions or any other nature.

Notable judgments

There have been some significant decisions with respect interpretation to MFN clauses in the past, a few notable cases can be summarised as below.

• Steria (India) Ltd. v. CIT [2016] 72 taxmann.com 1/241 Taxman 268/386 ITR 390 (Delhi)
  Delhi High HC reversed the order of Authority of Advanced Ruling (AAR) and held that a protocol is considered as part of the treaty itself and does not have to be separately notified for the purpose of application of an MFN clause. – This issue is now decided by the SC
• Concentrix Services Netherlands B.V. v. ITO (TDS) [2021] 127 taxmann.com 43/434 ITR 516 (Delhi)
  Delhi HC in the above case ruled that the focus was on the interpretation of the word ‘is’ and concluded that the word ‘is’ refers to a condition that should exist, not necessarily at the time DTAA was executed but when a taxpayer requests a lower rate withholding certificate under Section 197 of the Act. – This issue is now decided by the SC

CBDT Circular on MFN

To address these interpretation issues and provide clarity thereon, the Central Board of Direct Taxes (CBDT) issued Circular No 3/2022 dt 03.02.2022. The said circular outlines the conditions to be met for availing the benefits of MFN clause.

• Unilateral publication of revision in treaty rates by other treaty partners in their official communications shall have no binding force on the treaties and doesn’t represent shared understanding of the treaty partners.
• The third member state with which the treaty (second treaty) is being referred to, for the purpose of triggering MFN clause must be a member of the OECD both at the time of signing the treaty and also at the time of applicability of the MFN clause.
  In essence the third state with which the treaty has been signed has to be an OECD member on the date of signing the treaty and it must have been signed after the treaty with the first state.
• A separate notification under Section 90(1) of the Act is needed to extend the benefits of the second treaty to the treaty with the first state.

This circular however was held invalid by the ITAT Pune in GRI Renewables Industries SL v. ACIT (IT) [2022] 140 taxmann.com 448 (Pune – Trib.) which among others held that retrospective notification is invalid, as it is detrimental to the assessee for taking benefit given by the treaty and also held that a protocol is an integral part of the treaty and no separate notification would be needed.

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