There is no automatic application of MFN clause for lower withholding tax in India

The Supreme Court of India came out with its ruling on the “most favoured nation” (MFN) clause contained in the tax treaties of India-Switzerland, India – France, and India-Netherlands. The MFN clause under these treaties will not get automatically triggered merely because India has entered into treaties with other nations (Slovenia, Lithuania, and Colombia) who have become OECD members and whose tax rates were more beneficial.





In such an event, a notification under section 90 of the IT Act would be required to gain parity. In the past, the tax treaty and protocol of India-France came into force on 1st August 1994. Prior and post to which India has also entered into treaties with USA (in 1990) and Germany (in 1996). These treaties gave more beneficial or favourable treatment to the USA and Germany. All these nations were members of the OECD. Consequently, India vide notification under section 90 of the IT Act brought amendments to the provisions of India-France treaty. A similar practice in the past vide issuing notification under section 90 of the IT Act was also practiced to amend the treaties of India-Netherlands and India-Switzerland to give benefit or amend any provision.


Further, the Supreme Court has interpreted the expression “is” have present significance. The observation made under this was for a party (Switzerland, France and Netherlands) to claim benefit of same treatment with that of other nation (Slovenia, Lithuania, and Colombia), the other nation should have become the member of the OECD first and then entered into treaty with India then such claim could have significance.


Thus, a mere clause of MFN doesn’t gets automatically triggered for previous nations (Switzerland, France and Netherlands) entering into treaty with Indian and the other nations (Slovenia, Lithuania, and Colombia) first entering into treaty with India and later becoming the OECD member.



What It Means?


The MFN clause of previous OECD member countries doesn’t get automatically triggered without notification under section 90 of the IT Act if the contracting state first enters into treaty with India and later joins OECD. Supreme Court’s ruling will have implication on benefits taken by companies of the contracting states (Switzerland, France and Netherlands) on a presumption that the same tax rate (lower) would apply as applicable on other contracting states (Slovenia, Lithuania, and Colombia) who later became the member of OECD. The Indian Income tax department will gain revenue on this order. What is to be observed in future is the impact of this ruling on pending matters? Will it have retrospective effect? How will the concluded assessments on the very subject matter will be analysed, if any? How the treaty partner countries (Switzerland, France and Netherlands) would react on this judgement?



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