India: Notification required for taxpayer to claim benefit under income tax treaty most favored nations clause

Supreme Court decision

Supreme Court decision

The Supreme Court held that a taxpayer could avail itself of the benefit of most favored nations (MFN) clauses under India’s income tax treaties with the Netherlands, France, and Switzerland, only after the Indian government issued a Notification under Section 90 of the Income-tax Act, 1961, to that effect.

The court also held that beneficial treatment granted under a subsequent treaty with a country which is not an Organisation for Economic Cooperation and Development (OECD) member on the date of entering into the treaty, but subsequently becomes an OECD member, cannot be claimed under a MFN clause.

The case is: AO (International taxation) v. Nestle SA


MFN clauses in India’s income tax treaties with the Netherlands, France, and Switzerland (as well as other Indian income tax treaties such as those with Sweden and Hungary) extend the benefit of a lower rate or restricted scope with respect to certain specified incomes such as, interest, dividend, royalty, fees for technical services, if after the signature/entry into force of the treaty containing MFN clause, India enters into a treaty with an OECD member state which provides for a lower rate or restricted scope.

The taxpayer in this case sought to invoke a lower beneficial rate of 5% on dividend income under the MFN clause in the treaties with the Netherlands, France and Switzerland, vis-à-vis the treaties with Slovenia, Lithuania and Columbia, which became OECD members subsequent to entering into treaties with India.

KPMG observation

The court’s decision also affects claims made by taxpayers under MFN clauses in treaties that India has signed with countries other than the Netherlands, France and Switzerland.

In addition, the principle that MFN benefit can only be availed of by taxpayers in respect of subsequent treaties entered into by India with an existing OECD member country will significantly restrict the scope of benefits claimed under MFN clauses.

It will be interesting to see if the Indian government issues notifications for taxpayers to receive the benefit of MFN clauses (perhaps with retroactive effect) for treaties that have been signed by India previously (e.g., with France where the restricted scope for "fees for technical services" clause has not been specifically notified).

Read an October 2023 report [PDF 304 KB] prepared by the KPMG member firm in India 



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