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Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi vs M/s Nestle SA

Civil Appeal · 2023 INSC 928Decided 19 Oct 2023
Civil Appeal Nos. 1421-1432 of 2023
S. Ravindra Bhat · Dipankar Datta

Background

This was a batch of appeals concerning companies (including Nestle SA and others) based in Netherlands, France, and Switzerland claiming a lower withholding tax rate on dividends/royalties/fees for technical services in India, by invoking the "Most Favoured Nation" (MFN) clause in India's tax treaties with those countries. Their argument was that once India later gave a more favourable (lower) tax rate to another OECD-member country in a separate treaty, that same benefit should automatically flow through to them under the MFN clause, even though the relevant third country was not yet an OECD member when India signed its treaty with that country. The Delhi High Court had ruled in favour of the taxpayers, prompting appeals by the tax department.

Decision Breakdown

The Supreme Court reversed the High Court and ruled in favour of the tax authorities. It held two key things: first, that a formal notification under Section 90(1) of the Income Tax Act is a mandatory precondition before any court, authority, or tribunal can give legal effect to a DTAA or a change made via an MFN/Protocol clause: the benefit does not apply automatically just because the treaty text says so. Second, interpreting the word "is" in the relevant clauses to have present-tense significance, the Court held that for the MFN benefit to trigger, the third country must already have been an OECD member at the time it entered into its own DTAA with India, not merely become an OECD member at some later date. Since neither condition was met on the facts, the taxpayers' claims failed and the High Court's orders were set aside; the revenue's appeals were allowed with no order as to costs. One connected appeal concerning the India-Spain treaty was separated out to be heard by another bench since it wasn't covered by this reasoning.

Lesson Learnt

A treaty clause promising equal ("most favoured nation") tax treatment is not self-executing in India: taxpayers cannot claim a lower tax rate under an MFN clause unless the government has issued the required formal notification, and the comparison country must already have belonged to the relevant international grouping (like the OECD) at the time it signed its own tax treaty with India.

Official source (sci.gov.in)View Judgment (PDF)

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