Clarity or Complexity?: Decoding the Supreme Court’s Verdict on Interpreting MFN Clause in DTAAs

[Manas Rohilla and Smruti Kulkarni are 3rd year B.A., LL.B. (Hons.) students at the Gujarat National Law University, Gandhinagar]

On October 19, 2023, the Supreme Court of India, in the case of Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi v. Nestle SA delivered a controversial decision regarding the interpretation and application of the Most Favoured Nation (MFN) clauses in India’s Double Tax Avoidance Agreements (DTAAs) with the Netherlands, France, and Switzerland. This decision overturns previous rulings by the Delhi High Court that granted taxpayers the benefit of lower withholding tax rates or a narrower scope of income based on the MFN clauses.

This post provides an overview of the MFN clauses in DTAAs, examines the background of the controversy, and discusses the key aspects of the Supreme Court’s ruling. Furthermore, it analyses the implications of the judgment on stakeholders and explores the future of the MFN clause in India’s cross border tax treaties.

DTAA and MFN Clause

A DTAA is a bilateral agreement between two or more countries that aims to prevent the double taxation of income. It establishes rules for the allocation of taxing rights and provides methods, such as exemptions, credits, or deductions, to eliminate double taxation. Moreover, a DTAA promotes economic cooperation and helps combat tax evasion between the contracting states.

One important provision found in a DTAA is the MFN clause. This clause ensures that the residents of one contracting state receive treatment that is at least as favourable as that given to residents of a third country under a different DTAA. It is based on the principle of non-discrimination and prevents preferential treatment being granted to residents of one country over residents of the other contracting state. The MFN clause typically applies to specific types of income, such as dividends, interest, royalties, or fees for technical services (FTS).

Backdrop of the Controversy

India had entered into DTAAs with certain countries such as Netherlands, France, and Switzerland that included MFN clauses. These clauses stated that if India entered into a DTAA with a third country that provided a lower tax rate on dividend income than the rate in the DTAA with the MFN country, the residents of the MFN country would also be entitled to the lower rate.

India subsequently signed DTAAs with Slovenia, Lithuania, and Colombia, which provided a lower tax rate on dividend income. However, these countries were not members of the Organization for Economic Cooperation and Development (OECD) at the time of signing the DTAAs. The question arose whether the MFN clauses in the DTAAs with the MFN countries would be triggered by the DTAAs with these countries and whether the residents of the MFN countries would be eligible for the lower tax rate.

The Delhi High Court, in its decisions in Concentrix Services Netherlands B.V. v. Income Tax Officer (TDS) and Nestle SA v. Assessing Officer, held that the MFN clauses were triggered by India’s treaties with the countries which had concluded their treaties with India before they became OECD members. The Court also held that the benefit of the lower withholding tax rate or the narrower scope of income would be automatically available by virtue of the MFN clauses being present in the treaties, without the need for any separate notification by the government.

Further, in Steria (India) Ltd. v. Commissioner of Income Tax-VI, held that the MFN clause in the France-India treaty would require India to apply the narrower definition of FTS as provided in the UK-India treaty, which was concluded before the France-India treaty. The Court held that the MFN clause would apply to the scope of income as well as the tax rate, and that the narrower definition of FTS would be more beneficial to the taxpayer.

The tax authorities filed appeals against the Delhi High Court decisions before the Supreme Court. The Court was faced with the question of interpreting the MFN clauses and determining whether restrictions on tax rates and scopes of income agreed before a country’s accession to the OECD were permissible. It also considered whether the benefit of the restricted rate would automatically be available due to the presence of the MFN clause in the treaty.

Ruling of the Court

In its judgment, the Supreme Court reversed the findings of the Delhi High Court and provided clarity on two key issues regarding the MFN clauses in DTAAs. Firstly, the Court held that a separate notification under Section 90(1) of the Income Tax Act, 1961, is mandatory to give effect to the MFN clause and any consequent changes in the rate of tax on dividend income. The Court reasoned that the MFN clause amends the DTAA it is a part of, and such an amendment requires legislative action by the Parliament. The Court emphasized that India’s practice is to give effect to the MFN clause only after issuing a separate notification, and this practice should not be undermined.

Secondly, the Court clarified that the MFN clause is applicable only when the third country is a member of the OECD at the time of signing the DTAA with India. The Court interpreted the phrase “is a member” to mean that the third country must already be an OECD member when it enters into the DTAA with India for the earlier DTAA beneficiary to claim the MFN clause’s benefits. The Court rejected arguments for liberal interpretation in favour of the taxpayer, stating that the MFN clause is a special provision that requires strict interpretation.

In essence, the judgment established the requirement for a separate notification to activate the MFN clause and emphasized that the third country must be an OECD member at the time of signing the DTAA for the MFN clause to be applicable.

Deciphering the Implications of the Verdict

The judgment has significant implications for various stakeholders, including the Indian tax authorities, taxpayers from MFN countries, and the future of the MFN clause in India’s DTAAs.

For the Indian tax authorities, the judgment is a victory as it upholds their position and interpretation of the MFN clause. The Court’s ruling validates their circular requiring a separate notification for the MFN clause’s operation. It also enables them to recover tax dues from taxpayers who had claimed a lower rate of tax on dividend income using the MFN clause.

On the other hand, the judgment is a setback for taxpayers from MFN countries. It denies them the benefit of the lower tax rates they had claimed based on the MFN clause. Additionally, taxpayers now face the risk of tax demands, penalties, and interest charges from the Indian tax authorities for previous years. To seek relief from these adverse consequences, taxpayers may explore options like challenging the circular’s constitutional validity or invoking the mutual agreement procedure under the DTAAs.

Regarding the future of the MFN clause in India’s DTAAs, the judgment has both positive and negative implications. On one hand, it may create uncertainty and confusion for taxpayers and tax authorities regarding the applicability and interpretation of the MFN clause in other DTAAs. It may also discourage taxpayers from investing in India through MFN countries, as they may lose the benefit of lower tax rates on dividend income. On the other hand, the judgment may provide clarity and consistency in implementing and enforcing the MFN clause in India’s DTAAs. It may also encourage the Indian government to renegotiate DTAAs with MFN countries and other nations to align them with current tax policies and international standards.

Critics have also argued that the Court failed to apply the general rule of interpretation in the Vienna Convention on the Law of Treaties (VCLT), disregarded the object and purpose of the MFN clauses, and adopted a narrow and literal interpretation of key terms. Critics also contend that the additional requirement of government notification imposed by the Court lacks support and violates the principle of treaty autonomy. Furthermore, the ruling has created uncertainty and potential for double taxation by leaving open questions regarding the triggering of the MFN clauses in India’s treaties with other OECD members and the availability of additional credits from other contracting states.


The landmark judgment on the MFN clauses in India’s DTAAs settles the long-standing controversy and provides clarity on their operation and interpretation. While it is a victory for the Indian tax authorities, it has adverse implications for taxpayers who relied on the MFN clauses in good faith. The verdict raises concerns about the consistency and predictability of India’s tax treaty policy and disregards the legitimate expectations of taxpayers. The verdict has also exposed the need for a clear and consistent policy on the interpretation and application of the MFN clauses in India’s tax treaties. The government should consider issuing a notification or a circular to clarify the position and the practice on the MFN clauses, and to provide relief to the taxpayers who may be affected by the retroactive tax claims, interest charges and penalties. The government should also consider revising or renegotiating the MFN clauses in India’s tax treaties to ensure that they reflect the current and future developments in the international tax landscape, and that they serve the intended purpose of promoting non-discrimination, reciprocity and fairness among the treaty partners.

– Manas Rohilla & Smruti Kulkarni

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