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Supreme Court’s ruling on the MFN Clause in DTAAs between India and OECD Member Countries


Justice Ravindra Bhat of the Supreme Court has delivered a landmark judgment in AO Circle v. Nestle SA[i] on the interpretation and application of the Most Favoured Nation (‘MFN’) clause in tax treaties between India and member countries of the Organization for Economic Cooperation and Development (‘OECD’). The MFN clause is a provision that ensures equal treatment between contracting states based on benefits granted to a third state in a similar situation. The primary issue before the Hon’ble Supreme Court (‘the SC’) was whether the MFN clause operates automatically or necessitates a separate government notification under s. 90(1) of the Income Tax Act, 1961 (‘IT Act’).

The SC overturned decisions by the Delhi High Court and the Authority of Advance Ruling (‘AAR’), ruling that the MFN clause is not self-executing and is applicable only to OECD member countries at the time of entering into the Double Taxation Avoidance Agreement (‘DTAA’) with India, excluding those joining subsequently. This judgment establishes a precedent, emphasizing the procedural requirement of a notification for the MFN clause and restricting its scope to original OECD member countries at the time of treaty inception.

Brief Facts

  • Steria[ii] claimed a lower tax rate on fees for technical services (‘FTS’) under the India-France DTAA and invoked the MFN clause[iii] in the Protocol. Relying on the India-UK DTAA’s narrower definition of FTS, Steria argued for its inclusion in the India-France DTAA through the MFN clause. The AAR rejected this contention and held that the MFN clause required a separate government notification under s. 90(1) of the IT Act. However, the Delhi High Court reversed this decision, deeming the Protocol integral and a notification unnecessary.

  • Similarly, Concentrix[iv] and Optum[v] sought a reduced tax rate on FTS under the India-Netherlands DTAA, leveraging the MFN clause. The Delhi High Court, applying the principle of parity, ruled that the MFN clause was automatically applicable without a separate notification. Invoking the India-Kuwait DTAA with a lower tax rate, the Dutch companies successfully argued for its application to the India-Netherlands DTAA, even if Kuwait, was not an OECD member at the time of entering into the DTAA with India but became a member later.

  • Nestle SA, a Swiss company, asserted a claim for a reduced tax rate on dividends under the India-Switzerland DTAA by invoking the MFN clause in the Protocol. The Delhi High Court, consistent with its prior decisions, affirmed the clause’s automatic applicability of the clause without requiring a separate notification. Nestle SA, relying on the India-Lithuania DTAA’s lower dividend tax rate, successfully argued for its application to the India-Switzerland DTAA through the MFN clause, irrespective of Lithuania’s OECD membership status at the initial DTAA inception.


  • The SC allowed the Revenue’s appeals and set aside the orders of the High Court and the AAR. It held that the MFN clause is not self-executing and requires a notification under s. 90(1) of the IT Act to be effective. The Court observed that s. 90(1) empowers the government to notify tax treaties and that s. 90(2) of the IT Act makes the provisions of the IT Act more beneficial to the assessee.

  • The SC reasoned that the notification under s. 90(1) is a prerequisite for the tax treaty and its Protocol, serving as legislative approval for the treaty. It was held that the MFN clause applies only to OECD members at the time of entering into the DTAA with India and does not to extend to those who joined later.

  • The SC interpreted the term ‘is’ in the MFN clause as having a present signification and not future implications. It explained that the MFN clause operates based on reciprocity, with the OECD membership of the third country being determined at the time of entering into a DTAA with India. The SC acknowledged that the OECD membership is not a static concept and may change over time. Therefore, it concluded that the MFN clause cannot be extended to non-OECD members who joined later.


The SC has introduced a level of precision and formality to India’s treaty practice by asserting the necessity of notifications to breathe life into tax treaties. This decision clarifies the scope and applicability of the MFN clause in DTAAs and its relation to s. 90 of the IT Act. It emphasizes the dual nature of DTAAs and the balance between international obligations and domestic sovereignty. This decision also aligns with India’s constitutional order and the Union’s authority to make and implement tax treaties.

Furthermore, this decision provides certainty to taxpayers and authorities, by resolving the conflicting decisions of the Delhi High Court and the AAR on the MFN clause. It harmonizes the interpretation of the MFN clause with international perspectives and practices,  citing the Vienna Convention and the OECD Model. The SC has set a precedent for future DTAA disputes and engagements by stressing the procedural steps required for treaty benefits. This judgment also suggests a review and revision of the existing DTAAs to reflect the changing economic and legal realities.

End Notes

[i] Assessing Officer Circle (International Taxation) New Delhi v. M/s Nestle SA, 2023 SCC OnLine SC 1372.

[ii] Steria India Limited, a subsidiary of a French company.

[iii] The MFN clause provided that if India entered into a tax treaty with another OECD member country that restricted the scope of FTS or lowered the tax rate on FTS, then the same treatment would apply to the India-France DTAA as well

[iv] Concentrix Services Netherlands BV, a Dutch company.

[v] Optum Global Solutions International BV, a Dutch company.

Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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