In a seminal judgment, the Division Bench of the Supreme Court ruled in favor of the Revenue in a protracted and contentious dispute concerning the Most Favored Nation (MFN) clause in the tax treaties. This decision marks a significant departure from the established legal precedent. Its consequences are anticipated to reverberate extensively throughout the realm of international taxation, especially concerning the interpretation of the Double Taxation Avoidance Agreements (DTAA) and the protocols concerning DTAA.


To apprise, in the context of India's international treaties featuring MFN clauses, it's observed that the interpretation and application of such clauses have been the subject of legal disputes. To provide a comprehensive reference, we have outlined specific judicial decisions from Courts that have ruled in the taxpayer's favor. These decisions establish a precedent that, in certain cases, the benefit of an MFN clause can be availed without the necessity of a separate notification.

  • In one of the first judgments of Steria1, the Delhi High HC, reversing the order of Authority of Advanced Ruling (AAR), held that a protocol is considered as part of the treaty itself and does not have to be separately notified for the purpose of application of an MFN clause.

For the Delhi HC in Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V.2, and Nestle SA3, the focus was on the linguistic interpretation of 'is' concluding that the word 'is' refers to a condition that should exist, not necessarily at the time DTAA was executed but when a taxpayer requests a lower rate withholding certificate under Section 197 of the Income-tax Act, 1961 (the Act)

The relevance of these decisions became a contentious issue after the Central Board of Direct Taxes (CBDT) issued Circular No. 3/2022 dated 3 February 2022, which contradicted these rulings and disregarded the arguments presented by the taxpayer in those cases. The CBDT circular outlined the following conditions that must be satisfied for the benefits of the MFN clause to be applicable:

  • The second treaty must be made with a third state that is both a member of the Organization of Economic Co-operation and Development (OECD) at the time of signing a treaty with it and concluded after the initial treaty between India and the first state.

  • India must issue a separate notification under Section 90(1) of the Act to extend the benefits of the second treaty to the treaty with the first state.

However, the Pune Tax Tribunal in GRI Renewable Industries S.L.4 clarified that the retrospective notification for importing benefits from another DTAA is invalid. It asserts that once notified, the DTAA automatically includes all integral components, eliminating the need for additional notifications for the individual limbs of the DTAA.

In its recent judgment, the Hon'ble SC of India overturned various HC rulings by holding that issuing a notification under Section 90 to give effect to any treaty or convention is necessary. To accentuate the summary of arguments from both the parties and observation of the Hon'ble Supreme Court are as follows:

Revenue's Contentions

  • As per Article 73 and Article 253 of the Indian Constitution, the Union has exclusive executive power to enter international treaties and conventions. The Parliament holds the exclusive power to legislate upon such conventions or treaties. India follows the 'dualist' practice, which means that international treaties are not automatically assimilated into the national legal system upon their ratification and they would require enabling legislation.

  • Section 90 of the Act requires the issuance of a notification to give effect to a treaty or a convention, and mere entering into a treaty convention or protocol cannot give rise to any right under the taxation laws.

  • On the interpretation of the term 'is' contained in the protocol, it signifies the time when the provisions of the treaty are to be applied, and the MFN clause clearly demonstrates that the third state is required to be an OECD member as on the date of the signing of the treaty and not on any future date.

Taxpayer's Contentions

  • Section 90 only requires notification of a treaty or protocol and does not mandate each clause of such agreement to be further notified separately. The MFN clause is typically an integral component of a protocol and, hence, an inherent element of a treaty already notified.

  • Specific DTAA (like the India-Finland DTAA) requires India to notify Finland about the beneficial provision entered with the third state whenever the MFN clause gets triggered. However, the India-Switzerland DTAA does not require negotiation to give the benefit of a reduced rate of tax and requires notification in case of restricted scope. The use of different language in the DTAA by the two contracting states is indicative of their intent and cannot be disregarded whilst interpreting their terms. The MFN clause 'shall also apply' under this current convention is automatically in operation.

  • The absence of a unilateral notification cannot override the clear language of an MFN clause that provides for automatic application.

  • The Karnataka HC in Apollo Tyres Ltd. had considered the protocol to the India-Netherlands DTAA to be an integral part of the tax treaty, and no separate notification was required. The taxpayer's contention was that since this decision was not challenged, the issue had attained finality.

Court's Analysis and Observations

The Hon'ble SC of India analyzed that:

  • Entering into a treaty is an attribute of sovereignty, and the power to do vests solely with the Union executive which can be traced to Article 73 of the Constitution. However, the structure and phraseology of Article 253 leaves no doubt that when a treaty is enacted by law, or enabled through legislation, which assimilates it, such provisions are enforceable in India. If a treaty demands changes to existing law, impacts citizen rights, or necessitates new legislation for enforcement or financial matters, legislative action is required.

  • The Supreme Court, placing reliance on the decisions of various HC5 stated that India entering a treaty or protocol does not result in its automatic enforceability in Courts and Tribunals; the provisions of such treaties and protocols do not, therefore, confer rights upon parties until appropriate notifications are issued under Section 90(1) of the Act.

  • The Court noted that India has issued separate notifications to give effect to an MFN clause for India's DTAA with France and the Netherlands. It stated that there are established and clear precedents of behavior in relation to a treaty practice and its interpretation. This was uncontested and is a matter of record. The Court also discussed the language in the India-Canada DTAA for the application of the MFN clause, which does not require separate notification still the notification is issued to apply the clause.

  • Article 31 of General Rule on Interpretation of Vienna Convention on Law of Treaties, 1961 (VCLT), the principle of interpretation conveys that the treaty interpretation relies on subsequent agreements, practices and international law and collectively shaping its understanding and application. Accordingly, the treaties need to be read more liberally with its intention rather than actual words.

  • The expression 'is' has a present signification and it derives meaning from the context. Moreover, given this interpretation, the conclusion is that when a third-party country enters into DTAA with India, it should be a member of the OECD, in order for the second state to claim parity.

The Supreme Court's Conclusion

  • Section 90(1) notification is mandatory for a Court, Authority, or Tribunal to give effect to a DTAA or its protocol, altering the existing provisions of law.

  • The provision stipulating 'same treatment' in a DTAA or protocol with one nation does not automatically apply the same benefit when another nation receives better treatment. In such cases, the earlier DTAA terms must be amended through a separate Section 90 notification.

  • The term 'is' has a present meaning. Therefore, for a party to claim benefit of a 'same treatment' 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, such country becomes an OECD member after entering into DTAA with India.

1. W.P.(C) 4793/2014 dated 28 July 2016
2. (2016) 386 ITR 390 (Delhi): Judgment dated 22 April 2021 passed by Delhi HC in WP (C) No. 9051/2020 and connected matters
3. W.P.(C) No. 3243 of 2021 decided on 4 June 2021
4. ITA No.202/PUN/2021
5. 2003 (Supp4) SCR 222
[1991]190 ITR 626 (Cal)
[2001] 249 ITR 418 (Cal)
[1993]202 ITR 508 (KAR)
[1995] 212 ITR (Guj)

Our Comments
This ruling is significant as the same may impact various Indian tax treaties with countries like the Netherlands, Switzerland, France, etc. Since the application of the MFN clause without notification was settled through HC's ruling without being challenged by the Revenue earlier, many MNCs have been adopting this position. They may now have to revisit the tax position. As a result, this could also potentially impact the open litigation where this issue was settled, as Revenue authorities may rely on this decision and may take additional grounds/arguments during litigation. More importantly, it would be important to examine Revenue's approach to the past cases that were settled.

This conundrum will impact the tax world and will leave the taxpayers in a dilemma of whether to file for a review petition before the SC decision for the said decision or wait till it becomes the law of the land.