(2023) 458 ITR 756 (SC)
Agreements with foreign countries for double taxation relief (DTAA)
A separate notification under Section 90(1) is required. The MFN clause is not self-operational, and the third country must have been a member of the OECD at the time the treaty with India was entered into.
Does a most-favoured-nation clause in a tax treaty operate automatically when India later agrees a lower rate with another country, or must the benefit be separately notified?
Taxpayers resident in the Netherlands, France and Switzerland claimed reduced rates of withholding on dividends received from Indian companies. Their treaties with India contained most-favoured-nation clauses in protocols, under which India undertook to extend more favourable treatment in respect of specified income if it subsequently agreed such treatment with a third state that is a member of the OECD. India had later concluded treaties with Slovenia, Lithuania and Colombia providing lower rates. Those states were not members of the OECD when their treaties with India were signed, but became members afterwards. No notification had been issued extending the lower rates to the Netherlands, France or Switzerland.
The Delhi High Court had accepted the taxpayers' claims, holding the MFN clauses to be self-operational and the later OECD membership sufficient. A large batch of appeals by the Revenue came before the Supreme Court, which reversed.
For the assessee
The protocol forms an integral part of the treaty, which has already been notified. The clause operates of its own force when the trigger occurs, and no further notification is needed. The requirement of OECD membership should be tested when the benefit is claimed, and the practice of certain treaty partners, which had issued decrees extending the benefit, supports that reading.
For the Revenue
India follows a dualist system in which a treaty acquires domestic force only through notification under Section 90(1). Extending a more favourable rate alters the incidence of tax and therefore requires a notification. In any event the words of the protocol require the third state to be an OECD member at the time India entered into the treaty with it, not at some later date.
The Court decided both questions in the Revenue's favour. On the first, it held that India's constitutional arrangement is dualist: a treaty does not by itself operate in domestic law, and Section 90(1) supplies the mechanism by which it is given effect. It follows that a modification of the treatment accorded under a treaty — which is what invoking the MFN clause achieves — requires a notification in the same manner. The Court observed that the consistent practice of the Indian executive had been to issue such notifications, and that the absence of one is significant. On the second question, the Court construed the words of the protocol, which refer to a state that 'is a member of the OECD', as directed to the position when India entered into the treaty with that third state. A state joining the OECD subsequently does not retrospectively bring earlier treaties within the clause. The Court acknowledged that some treaty partners had taken a different view in their own domestic decrees, but held that the interpretation of the clause in India must follow Indian constitutional requirements and the ordinary meaning of the words. It expressly noted that its ruling would affect a substantial number of pending claims.
Directly affects treaty positions on dividends, interest, royalties and fees for technical services, and unsettled a substantial number of refund and withholding claims made on the strength of the Delhi High Court's view. Under the IT Act 2025 the enabling provision is Section 159. Any MFN-based rate claim now needs a notification to point to, and positions taken in earlier years on the contrary view may require review.