Nov 20, 2023

SC Decision in Nestle – Most-Favored Nation Clause under Tax Treaties Rendered Redundant!!

The recent decision of the Hon’ble Supreme Court of India (‘SC’) in the case of AO v. M/s Nestle SA[1], has caused a rarely seen upheaval in the tax jurisprudence as the same seeks to upend the basics of treaty interpretation, which for long were seen as settled. By way of this landmark judgment, the SC has inter alia held that the benefit of a lower rate of tax or a restricted scope agreed by India in a subsequent tax treaty cannot be directly imported to another treaty by way of a Most Favored Nation (‘MFN’) clause, unless the same is separately notified by India.

The entire saga has been aptly captured in our October, 2021 and February, 2022 edition of What’s Up in Tax, and this edition focuses on the implications of this decision. To give a brief context of the lis before the SC – the Revenue Department challenged the decision of the Delhi High Court (‘Delhi HC’)[2] whereby the lower rate of 5% on dividend income of non-resident as envisaged in India-Slovenia tax treaty was imported in India-Netherlands tax treaty by virtue of the MFN clause which formed an integral part of the India-Netherlands tax treaty. The primary ground of challenge being whether the MFN clause enshrined under the protocol forming integral part of the tax treaty would be applicable automatically or by way of issuance of a separate notification under Section 90 of the Income Tax Act, 1961 (‘IT Act’). The Income Tax Department contended that the MFN clause would be triggered only when it has been notified by the Government of India by way of a separate notification in terms of Section 90 of the IT Act. Further, it was also disputed that the benefit provided under MFN clause could only be claimed from the tax treaty that was signed with another Contracting State who was a member of Organisation for Economic Co-operation and Development (‘OECD’) at the time of signing of such tax treaty with India, and not if it became a member subsequently.

The SC, while deciding the issue, heavily relied on the so called “subsequent practice” adopted by the Government of India in respect of the issuance of separate notification for applicability of the MFN clause to hold that that MFN clause under other tax treaties would not be applicable automatically, unless such applicability is notified separately under Section 90 of the IT Act. The SC in its wisdom has also held that the word “is” will be interpreted contextually, and held that the benefit of the MFN clause could only be claimed from the tax treaty that was signed with a nation who was already a member of the OECD at the time of entering into such tax treaty.

The ruling rendered by the SC has wide ramifications with respect to applicability of MFN clause envisaged under various tax treaties specifically in the context of “make available” condition relevant to tax a service as “Fee for Technical Services”. While the said condition is absent in various tax treaties, taxpayers were claiming benefit of such clause on the strength of the MFN clause as interpreted by the Delhi HC in the case of Steria (India) Pvt. Ltd. v. Commissioner of Income-tax[3]. The decision of the SC has shaken the fundamentals of tax position taken by various multi-national companies. While certain corners of the tax fraternity are pushing for a review of the said decision but as things stand today this decision is law of the land and taxpayers may need to realign their stance.

[1] AO v. M/s Nestle SA, [Decision dated 19.10.2023 in Civil Appeal No. 1420 of 2023] (SC).

[2] Concentrix Services Netherlands B.V. v. Income-tax Officer, [2021] 434 ITR 516 (Delhi HC).

[3] Steria (India) Pvt. Ltd. v. Commissioner of Income-tax, [2016] 386 ITR 390 (Delhi HC).




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