Introduction
The judgment delivered by the Hon’ble Supreme Court of India in Income Tax Officer v. Deccan Holdings B.V.[i] has conclusively settled legal conundrums surrounding the interpretation and application of the Most Favoured Nation (‘MFN’) clause in Double Taxation Avoidance Agreements (‘DTAAs’) between India and member nations of the Organization for Economic Cooperation and Development (‘OECD’). Addressing the issue of whether a notification under s. 90(1) of the Income-tax Act, 1961 (‘Act’) is required to implement a DTAA or its Protocol[ii]; the Court ruled that such notification is a mandatory prerequisite when a Protocol modifies the DTAA’s terms and conditions, particularly when it alters existing legal provisions.
The Court also clarified the ‘same treatment’ clause, stating that when a party seeks to benefit from this clause based on a DTAA between India and an OECD member state, the relevant date is when the treaty with India was initially signed, and not when the country subsequently gained OECD membership. Reaffirming its earlier position in Assessing Officer (International Taxation) v. Nestle SA[iii] (‘Nestle 2023’), the Supreme Court upheld the necessity of a government notification to operationalize the MFN clause.
Brief Background
To fully appreciate the significance of this judgment, it is important to understand the legal developments that led to this ruling.
Steria (India) Ltd. v. CIT[iv] – [2016] Delhi High Court
The Court examined whether the Protocol signed between India and France formed an integral part of the DTAA, thereby making a separate notification unnecessary. The Court held that once the DTAA had been notified and it contained the Protocol, no additional notification was required. It further ruled that beneficial provisions in a DTAA between India and another OECD member state could apply automatically under the MFN clause without a separate notification.
Concentrix Services Netherlands B.V. v. ITO[v] – [2021] Delhi High Court
The primary issue was whether the MFN clause in the India-Netherlands DTAA applied automatically or required a separate notification under s. 90(1) of the Act. Relying on Steria (supra), the Court ruled in favour of the assessee, holding that the Protocol formed an integral part of the DTAA and did not require separate notification. However, it clarified that the MFN clause applied only if (i) the third state (with which India signed a DTAA) was an OECD member at the time of signing and (ii) the third state’s DTAA with India prescribed a lower withholding tax rate than the one in the India-Netherlands DTAA.
Deccan Holdings B.V. v. ITO[vi] – [2021] Delhi High Court
The central issue was whether the assessee was entitled to a lower withholding tax rate of 5% under the India-Netherlands DTAA based on the MFN clause. The assessee argued that since India’s DTAAs with other OECD countries (such as Slovenia, Lithuania, and Columbia) provided a lower 5% withholding tax rate, the same should apply to its case. The Delhi High Court, following its own decision in Concentrix (supra) and Nestle SA v. Assessing Officer[vii] (‘Nestle 2021’), ruled in favour of the assessee, holding that the MFN clause was self-executing and did not require a separate government notification.
Assessing Officer (International Taxation) v. Nestle SA - [2023] Supreme Court
The Supreme Court examined whether a notification under s. 90(1) of the Act was mandatory for enforcing a DTAA or its Protocol, particularly when it modifies taxation provisions. Overruling the Delhi High Court’s interpretation, the Court held that the MFN clause is not self-executing and requires express government notification under s. 90(1) of the Act. It further ruled that the MFN clause applies only to countries that were OECD members at the time the DTAA was signed and that subsequent accession to the OECD does not extend MFN benefits automatically.
A review petition[viii] was later filed by the assessee against this decision, but the Supreme Court dismissed the petition, thereby making the Nestle 2023 decision binding.
Brief Facts and Decision in this Case
Deccan Holdings BV (‘Assessee’), a Netherlands-based company, is engaged in acquiring, owning, and disposing of strategic ownership interests in companies both within the Netherlands and abroad. The Assessee held 58.39% of the shares in Deccan Fine Chemicals (India) Private Limited (‘DFCPL’).
In August 2021, the Assessee filed an application under s. 197 of the Act seeking a certificate authorising a lower withholding tax rate of 5% on dividends received from DFCPL, citing the MFN clause in the India-Netherlands DTAA. The India-Netherlands DTAA prescribes a default withholding tax rate of 10%, but India had signed DTAAs with other OECD member countries (such as Slovenia, Lithuania, and Columbia) that prescribed a lower 5% tax rate. The Assessee argued that the lower rate should automatically apply under the MFN clause.
The Delhi High Court relied on its earlier decisions in Concentrix (supra) and Nestle 2021 and ruled in favour of the Assessee, holding that the MFN clause was self-executing and did not require separate notification under s. 90(1). Accordingly, the Court directed the Revenue to issue a certificate under s. 197 of the Act, allowing a 5% withholding tax rate instead of 10%.
The Revenue challenged the High Court’s decision before the Supreme Court, which had already overruled Concentrix (supra) in Nestle 2023. Applying this precedent, the Supreme Court set aside the Delhi High Court’s ruling, holding that the MFN clause does not automatically apply and that a government notification is a mandatory prerequisite. Consequently, the Revenue’s appeal was allowed, and the High Court’s ruling was overturned.
Our Analysis
This judgment is crucial in understanding both municipal and international taxation jurisprudence. It serves as a gentle reminder that the power to enter into a treaty is an attribute of sovereignty vested exclusively in the Union executive. However, treaties do not ipso facto acquire enforceability in domestic law unless incorporated through legislation or formal government notification. While the Union Government is bound by international treaties, their provisions do not automatically apply to Indian nationals unless formally incorporated in domestic law.
By quickly allowing the Revenue’s appeal, the Supreme Court reaffirmed its reliance on customary international law, particularly the International Law Commission’s (‘ILC’) Draft Conclusions on Subsequent Agreements and Subsequent Practice in relation to the Interpretation of Treaties.[ix] The ILC Draft Conclusions define a ‘subsequent agreement’ as an agreement reached between parties after a treaty’s conclusion, relating to its interpretation and application. Similarly, ‘subsequent practice’ refers to the consistent application of a treaty that establishes a shared interpretation.
This ruling brings greater legal certainty to India’s treaty framework while reinforcing sovereign control over tax treaty implementation. Given the accelerating pace of globalisation and India’s expanding economy, disputes regarding DTAA interpretation will continue to rise. However, this judgment establishes a structured and legally sound framework for resolution of MFN-related issues.
End Notes
[i] 2025 SCC OnLine SC 332 dated 07.01.2025. A Private Limited Company (BV), or ‘Besloten Vennootschap’ in Dutch, is a legal entity with limited liability.
[ii] A Protocol is an integral part of a DTAA that may introduce additional provisions, clarifications, or modifications to its terms. It operates as a supplementary agreement that is negotiated alongside the DTAA or added subsequently to refine its application.
[iii][2023] 155 taxmann.com 384 (SC).
[iv][2016] 72 taxmann.com 1 (Delhi).
[v][2021] 127 taxmann.com 43 (Delhi).
[vi][2021] 133 taxmann.com 94 (Delhi).
[vii][W.P. (C) 3243 of 2021] dated 15-03-2021.
[viii] Nestle SA v. Assessing Officer (International Taxation), [2024] 165 taxmann.com 334 (SC).
[ix] ILC Draft Conclusions on Subsequent Agreements and Subsequent Practice in Relation to the Interpretation of Treaties, available at https://legal.un.org/ilc/texts/instruments/english/draft_articles/1_11_2018.pdf
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.