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MoF - Representation on most favoured nation clause under tax treaties signed by India with other countries

Tejasvi

@tejasvi

March 22, 2024

Public Policy

Background

India has entered into Double Taxation Avoidance Agreements (DTAAs) with more than 90 countries across the world to eliminate double taxation of income and to harmonise tax treatment between India and other country, so as to encourage trade and investment.
India’s DTAAs with certain countries, who are also members of the Organisation of Economic Cooperation and Development (OECD), have a clause on Most Favoured Nation (MFN clause). MFN clause ensures that taxpayers residing in one country receive tax treatment from the other country equivalent to or better than those given to residents of a third country (also an OECD member) under a separate DTAA. MFN clause typically applies to specific types of income such as dividends, interest, royalties, or Fees for Technical Services (FTS).
For example, Country A and Country B have signed a DTAA having MFN clause and the tax rate applicable on FTS is 15%. Subsequently, Country A signs another DTAA with Country C (also an OECD member) wherein the tax rate on FTS is restricted to 10% subject to satisfaction of ‘make available’ condition. In such a situation, a 10% rate as well as criteria of satisfaction of ‘make available’ condition will apply on FTS taxation between Country A and B due to inclusion of MFN clause in that DTAA.
In the context of application of MFN clause, there has been lot of litigation on whether MFN clause can be applied automatically based on its inclusion under DTAA/ protocol to DTAA or it will apply pursuant to a separate notification issued by Central Board of Direct Taxes (CBDT) for each DTAA to give effect to the MFN clause.
In this regard, various High Courts have held that application of MFN clause is automatic and there is no requirement for a separate notification to give effect to the same [Decision of Delhi High Court in the case of Steria (India) Ltd. v. CIT [2016] 72 taxmann.com 1 (Delhi)as well as the Hon’ble Karnataka High Court in the case of Apollo Tyres Ltd. v. CIT [2018] 92 taxmann.com 166 (Kar. HC)].
Considering numerous favorable judicial precedents, non-resident taxpayers having investments in India or doing businesses with India have adopted the position that applicability of MFN clause is automatic in respect of both withholding of tax as well as for tax return filing in India.
Based on the above, we believe the benefit of MFN clause should be given on an automatic basis (i.e., there should be no need for a separate notification to be issued for applicability of MFN clause).
However, recently, Hon’ble Supreme Court of India in the case of M/s Nestle SA & Others (supra) has unsettled the above position and held that MFN benefit can only be applied if there is a corresponding notification by the CBDT giving effect to the same. In other words, Hon’ble Supreme Court has held that issuance of separate notification is mandatory for application of MFN clause.
As a result, past positions adopted by taxpayers could now be challenged by tax authorities. This could lead to long-drawn litigation and unjust high tax demands for such taxpayers, thereby substantially increasing the cost of doing business in India for non-residents as well resident payers [in case of net of tax contracts]. This may have a significant adverse impact on India’s potential to attract foreign investments and will be against India’s long-term objective of enabling ease of doing business in India. Please note that, as per news reports, a review petition has already been filed in the Supreme Court against the Supreme Court ruling pronounced in the case of Nestle SA.

Our request

In view of the hardships that could be faced by the taxpayers and pending the adjudication of review petition, we believe that the benefit of MFN clause should be made available on an automatic once the DTAA (along with Protocol) is notified. Accordingly, we have requested CBDT to frame its procedures and policies on this matter in a manner that enhances ease of doing business and removes possible bottlenecks that may arise with the added step of issuance of notifications.
However, given the observation made by the Hon’ble Supreme Court in the case of Nestle SA & Others (supra), we have also requested CBDT to issue appropriate notifications in respect of application of MFN (with effect from the date on which MFN clause was incorporated into the tax treaty) wherever such MFN benefit has not been completely/ partially notified.
This will provide certainty to taxpayers and promote India’s long-term objective of ease of doing business.

We hope you will find the update useful. Please write to tejasvi@nasscom.in in case you have any feedback.

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Tejasvi

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