Most Favoured Nation (MFN) clause in a DTAA
The MFN clause in DTAA provides that if, after signature of the tax treaty with the first country (original treaty), India enters into a DTAA on a later date with a third country, which is an OECD member, providing a beneficial rate of tax or restrictive scope for taxation of dividend, interest, royalty, etc. a similar benefit should be accorded to the first country.
In a landmark judgment, the Hon’ble Supreme Court (SC) on 19 October 2023 in the case of Nestle SA, ruled that in order to invoke the beneficial provisions of a DTAA pursuant to MFN clause, India is required to specifically issue a notification to this effect. In absence of specific notification reflecting consequential amendment, MFN provisions cannot be invoked.
The SC decision is likely to impact the Indian companies that may have made remittances outside India, in respect of payments towards interest, royalty, fees for technical services, dividend etc, without deducting taxes or after deducting taxes at a lower tax rate, by relying on MFN provisions and its scope as understood by lower courts. The impacted taxpayers may need to explore and revisit the applicable provisions for making subsequent foreign payments.
For further queries and clarifications kindly contact CA Latha Sree. Her e-mail id is [email protected].
Please click the below link to read / download a brief note on MFN clause.