Supreme Court Ruling on MFN Clause in Tax Treaties – A Compelling Case for Review

 Overview

The Supreme Court of India recently ruled on the applicability of the Most Favoured Nation (MFN) clause in tax treaties involving India, specifically in Assessing Officer vs. M/s Nestle SA and Others. The Court determined that an Indian government notification is a mandatory prerequisite for the MFN clause to be enforceable in India’s Double Tax Avoidance Agreements (DTAAs). This ruling restricts certain benefits within these treaties and conflicts with previously understood international principles of good faith in treaty enforcement.

MFN Clause in Context
Typically, MFN clauses are intended to ensure fair and equal treatment among treaty partners. When one country extends a favorable condition to another in a DTAA, the MFN clause requires this condition to apply to all partner countries under similar agreements. India's treaties with several countries (such as Spain, France, Belgium, Netherlands, etc.) include MFN clauses, but recent notifications have limited the clause's application, specifically to royalty and technical service fee rates.

Self-Operating vs. Non-Self-Operating Clauses
MFN clauses in tax treaties can be self-operating (taking effect automatically) or non-self-operating (requiring additional steps, such as renegotiation). While many of India’s treaties have self-operating clauses, the Supreme Court has held that Indian tax authorities must issue a formal notification for these benefits to be accessible to taxpayers.

Constitutional and Legislative Framework
The Court referred to Articles 253 and 73 of the Indian Constitution to explain that international treaties require legislative enactment or a notification in India to be enforceable. Thus, treaties or protocols only become effective once formalized through legislative action or notification.

International Law and Vienna Convention Principles
Although India is not a signatory to the Vienna Convention, principles of international law, such as good faith in treaty performance (Article 26 of the Vienna Convention), are considered binding. The Court’s ruling, however, diverges from these principles, potentially undermining India’s treaty commitments and impacting foreign investment.

Implications and Conclusion
The Supreme Court's ruling implies that protocols and MFN clauses in India’s tax treaties may be inoperative without further government action, creating uncertainty for foreign investors. The authors contend that adhering to the MFN clause is not discretionary, suggesting that the ruling should be revisited to maintain alignment with international law and treaty obligations.