This tax alert summarizes a recent Supreme Court (SC) decision in a batch of appeals with lead case being that of Nestle SA[1] (Taxpayers), wherein the SC set aside the underlying favorable Delhi High Court (HC) decisions[2] and examined the following two issues:
- Whether the most favored
nations (MFN) clause is to be given effect to automatically or it comes
into effect only after a notification is issued; and
- 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 Double Tax Avoidance Agreement (DTAA or
treaty), which was not an Organisation for Economic Co-operation and
Development (OECD) member at the time of entering into such DTAA.
The SC ruled that in
order to give effect to a DTAA or any Protocol changing its terms or
conditions, which has the effect of altering the existing provisions of law,
notification under Section 90(1) of the Indian Tax Laws (ITL) is necessary and
mandatory. Unlike other countries, mere signing or ratification of a treaty
does not become enforceable in India, as exclusive power to legislate the
treaties entered into by India lies with the Parliament. Accordingly, the
legislation is required to give effect to the treaty if it affects the rights
of citizens or modifies the Indian law. Even with reference to MFN clause
already agreed as part of an existing treaty, the beneficial provisions entered
into with third country cannot be made applicable automatically unless a
notification is issued. The treaty practice of India in relation to DTAAs and
their Protocols suggests that any subsequent beneficial provision signed with
other OECD member state is extended to earlier treaty beneficiaries only by way
of a notification.
On the aspect of the time period when a third country should be an OECD member
in order to apply the beneficial treatment accorded to such country by invoking
MFN clause, the SC held that the expression “is” in the sentence “third state which is a member of OECD”
of MFN clause, has a present significance and derives the meaning from the
context. Therefore, if a party seeks to avail the benefits of a “same
treatment” clause based on the existence of a DTAA between India and another
third country which is an OECD member state, the relevant date is the initial
treaty signing date with India and not any subsequent date when that third
country becomes an OECD member.
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