Explained: Recent Supreme Court judgement on applicability of Most Favoured Nation (MFN) for Taxation

financialexpress.com:

Question: We are an Indian-based entity with various group companies in foreign jurisdictions. There are many intercompany transactions with such group companies which are subjected to a lower withholding tax rate in accordance with the relevant treaty owing to MFN. Kindly highlight the recent Supreme Court judgement in the case of applicability of the Most Favoured Nation MFN.

Answer by Dr Suresh Surana, Founder, RSM India: The Apex Court (while hearing batch of appeals arising from decisions of the Delhi High Court in the case of CIVIL APPEAL NO(S). 1420 OF 2023 Assessing officer Circle International Taxation) 2(2)(2) New Delhi vs M/s Nestle SA) passed a vital judgement involving interpretation of the Most Favoured Nation (MFN) clause contained in various Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development (hereafter ‘OECD’).

The Apex Court concluded on the following issues:

Issue 1:

Whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement (hereafter ‘DTAA’) was not an OECD member yet (at the time of entering into such DTAA)

The Supreme Court concluded that a taxpayer/party in order to claim benefit of a MFN clause, based on entry of DTAA between India and another state which is member of OECD, the relevant date is entering into treaty with India, and not a later date, when, after entering into DTAA with India, such country becomes an OECD member, in terms of India’s practice.

Issue 2:

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.

The Apex Court held that a notification under Section 90(1) is