In a batch of appeals arising from the decision of the Hon'ble High Court of Delhi in the case of Nestle SA and Others, the Hon'ble Supreme Court of India examined the Most Favored Nation (‘MFN’) clause of the India-Netherlands, India-France, and India-Switzerland tax treaties and ruled that a separate notification is required under section 90(1) of the Income-tax Act, 1961 (‘Act’) to give effect to a tax treaty or its Protocol changing terms and conditions that modifies existing provisions of the law. 

The MFN clause provides for a reduction in the rate of taxation at source on dividends, interest, royalties, or fees for technical services (FTS), as applicable, or a restriction on the scope of royalty/FTS in the tax treaty, similar to a concession granted to another OECD country subsequently.

In the aforesaid judgement, the Supreme Court examined the following two issues: 

  • Whether there is any right to invoke the MFN clause when the third country with which India has entered into a tax treaty was not an OECD member yet (at the time of entering into such tax treaty)?

  • Whether the MFN clause is to be given effect to, automatically, or if it is to only come into effect after a notification is issued?

In the attached Newsflash, we have analysed the aforementioned issues as discussed by the Supreme Court.