Indian Supreme Court's decision in Nestle SA on interpretation of MFN clause needs a relook

'Most Favoured Nation' or 'same treatment clause' is a status that Country A can provide to Country B in a bilateral agreement. When someone is favoured, we provide certain benefits to that person. Tax treaties often contain a Most Favoured Nation (MFN) clause. The MFN clause aims to ensure a level playing field. Following is the extract from protocol to the India-Switzerland DTAA:

In the ongoing controversy over the applicability of MFN clause in tax treaty, the Supreme Court of India has recently clarified that taxpayers cannot claim that such benefit is automatic. The same would be available only when a notification to that effect has been issued by the Government of India.

A tax treaty is a Sovereign document. It is a promise made by one Government to another Government (State). Supreme Court's view that the other country (Country B) should be member of OECD on the date when treaty with Country A (Switzerland in this case) was signed is well reasoned. However, following part of the Supreme Court's decision needs a relook:

The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90.

In terms of the Protocol to the India-Switzerland treaty, Government of India made a promise to Government of Switzerland that if India limits its right to taxation vis-a-vis a OECE member country in a later treaty in respect of taxation of dividend, interest, Royalty and FTS, the same taxation norms would apply to residents of Switzerland also. This promise was an unequivocal promise. There was no condition that the benefits would apply only when the same is notified by Government of India. Will departure from an earlier promise not lead to a breach of trust? Is it a fair thing to do? Just because a notification is not issued by Government of India, should a Sovereign promise not be fulfilled?

Satyameva Jayate:

The word 'eva' in Sanskrit means 'only or alone'. Satyam + Eva = Satyameva. We are used to interpreting 'Satyameva Jayate' as 'truth wins'. However, its significance is paramount. Satyameva Jayate literally means 'truth only wins' or 'truth alone wins'.