Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi vs M/S Nestle SA

Court/Forum: SC

Bench: S. Ravindra Bhat, J.

Order Date: 2023-10-04

Outcome: Revenue

Sections: Section 90

Core Ratio

The MFN clause in a DTAA requires a specific notification to be effective, and mere entry of a third country into OECD does not automatically trigger benefits.

Outcome

The Supreme Court ruled in favor of the Revenue, holding that the MFN clause in the DTAAs does not automatically apply without a specific notification under Section 90 of the Income-tax Act, 1961.

Favourability

Revenue

Core Issue

The central legal question was whether the MFN clause in the DTAAs required a separate notification to be effective, especially when a third country becomes an OECD member after the DTAA was signed.

Facts of the Case

The case involved the interpretation of the MFN clause in DTAAs between India and countries like Netherlands, France, and Switzerland. The issue was whether benefits extended to other OECD countries could be automatically applied to these countries without a separate notification.

Arguments by Assessee

The assessees argued that the MFN clause should automatically apply once a third country becomes an OECD member, without the need for a separate notification.

Arguments by Revenue

The Revenue contended that a notification under Section 90 is necessary for the MFN clause to be effective, and mere OECD membership of a third country does not trigger automatic benefits.

Key Sections & Provisions

Section 90 of the Income-tax Act, 1961, which deals with agreements with foreign countries for avoidance of double taxation.

Ratio Decidendi

The court held that the terms of a treaty do not automatically acquire enforceability in domestic law without a notification under Section 90. The interpretation of 'is' in the context of OECD membership was crucial, and the court concluded that the third country must be an OECD member at the time of entering into the DTAA with India.

Court Reasoning & Analysis

• The court emphasized the need for a notification under Section 90 for the MFN clause to be effective.
• The interpretation of 'is' was crucial, and the court held that the third country must be an OECD member at the time of entering into the DTAA.
• The court noted the treaty practice of India, which requires a notification to give effect to treaty provisions.
• The court rejected the argument that the MFN clause is self-operating without a notification.

Key Observations

• The MFN clause requires a notification under Section 90 to be effective.
• The interpretation of 'is' in the context of OECD membership is crucial.

Case Laws Cited

• Union of India (UOI) & Ors. v. Azadi Bachao Andolan & Ors.
• Gramaphone Co. of India Ltd v. Birendra Bahadur Pandey & Ors.

Related Issues

• Interpretation of DTAAs
• Role of notifications in treaty implementation
• OECD membership and its implications

Important Passages

• The MFN clause in a DTAA requires a specific notification to be effective.
• The interpretation of 'is' was crucial, and the court concluded that the third country must be an OECD member at the time of entering into the DTAA with India.

Not Decided / Remanded

The court did not decide on the automatic applicability of MFN clauses without notifications.

Practical Takeaway

Practitioners should note that MFN clauses in DTAAs require a notification under Section 90 to be effective, and mere OECD membership of a third country does not trigger automatic benefits.

Supporting Judgments

• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax (HC) — The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.

Contrary Judgments

• Union of India and Anr. vs Azadi Bachao Andolan and Anr. (SC) — The provisions of a Double Taxation Avoidance Agreement, once notified, override the provisions of the Income-tax Act to the extent of inconsistency.
• The Authority for Advance Rulings (Income Tax) and Others vs Tiger Global International II Holdings (SC) — The DTAA between India and Mauritius allows capital gains to be taxed only in Mauritius, provided the entity holds a valid TRC.
• Mon Mohan Kohli vs Assistant Commissioner of Income Tax & Anr (HC) — The Government cannot extend the applicability of legislative provisions beyond the dates specified by the Legislature through notifications.