SC Ruling on MFN Clause in Tax Treaty: A conundrum for the tax deductors in India?

20 十一月 2023

by S. Vasudevan Bharathi Krishnaprasad Krishna Laasya V


Recently, the Supreme Court of India passed a judgment interpreting the Most Favoured Nation (‘MFN’) clause present in various Double Taxation Avoidance Agreements (‘DTAAs’). In essence, an MFN clause is incorporated in DTAAs entered into by India with a country (say second state) by which a promise is made by India to give the same benefit or preferential treatment which India may accord to another country (say third state) in future. 

The ruling was delivered in a batch of appeals filed by the tax department against various taxpayers including Steria India, Concentrix Services and Nestle SA. This Article aims to delve into the intricacies of the decision and in turn, lay emphasis on the plausible ramifications on the benefits claimed by taxpayers in the past.

Background of the case

The facts leading up to the dispute before the SC in the lead matters are summarized below -

Steria India: The Indian entity was liable to pay certain fee for technical services (‘FTS’) to a tax resident of France. The question was whether the restrictive definition pertaining to FTS as contained in India-UK DTAA due to “make available” condition can be borrowed and read into India-France DTAA by virtue of MFN clause in the later treaty (Clause 7 of the Protocol to India-France DTAA). The Authority of Advance Ruling (‘AAR’) initially ruled that the Protocol cannot be a part of the DTAA and further held that the ‘make available’ clause as per India-UK DTAA cannot be read into the India-France DTAA unless a notification under Section 90 of the Income Tax Act, 1961 (‘IT Act’) is issued by the Indian Government. Upon challenge by the taxpayer, the decision of the AAR was reversed by the High Court.

Concentrix Services Netherlands BV and Optum Global Solutions International BV: The Dutch entities were recipients of dividend income from the companies in India. India-Netherlands DTAA prescribed a withholding rate of 10% on dividends. Subsequently, India entered into treaty with Slovenia which prescribed a lower withholding rate of 5% on dividends. After entering into treaty with India, Slovenia became member of OECD. The Dutch entities placed reliance on the MFN clause in the Protocol to the India-Netherland DTAA to claim benefit of lower withholding rate of 5% which is agreed to by India with another OECD member, viz. Slovenia. When the tax authorities rejected this claim, the Dutch entities approached the High Court by way of writ petition. The Delhi High Court allowed the claim of 5% withholding rate for the reason that benefit under the MFN clause should be extended from the date the third state (Slovenia) became a member of the OECD.

Nestle SA: The facts were similar to Concentrix case. The Assessee was a tax resident of Switzerland and sought withholding at the lower tax rate of 5% on dividends received from Indian subsidiary by invoking MFN clause in the Protocol to India-Switzerland DTAA read with the India-Lithuania DTAA. Here again, Lithuania had become an OECD member after entering into tax treaty with India. The Delhi High Court relied on its decision in Concentrix Services[1] and held that lower tax withholding certificate at 5% must be issued.
Decision of the SC

India entering into a DTAA and Protocol with another state does not automatically confer enforceability before the Indian Courts. The enforceability of the said DTAAs and Protocols arise only after a notification is issued by the Central Government in exercise of Section 90(1) of the IT Act. If the preferential treatment accorded by India in a DTAA with a third state is to be claimed by virtue of MFN clause contained in any other treaty, a separate notification must be issued by the Indian Government. The benefits of the MFN clause can be extended only if the third state is a member of the OECD on the date on which the DTAA with the third state was entered into. Thus, the SC concurred with the view of the tax department and held that the concerned DTAA has to be legislatively brought into the law through a separate statute or vide a notification. If not done so, the said DTAA and Protocol would not be legally enforceable.

Implications of the SC Judgment on tax deductors

Apart from the direct impact on the taxpayers who were parties to the dispute before the SC, the above ruling will have wide ranging ramifications on cases where MFN benefit under various tax treaties have been claimed in the past.

The payers located in India, who have deducted and deposited withholding tax at lower rates by taking into account the MFN benefit, may face tax demands under Section 201 of the IT Act. Section 201(1) provides that where a person who is required to deduct a sum in accordance with the provisions of the IT Act does not deduct, then such a person shall be deemed as an assessee-in-default and the tax not so deducted shall be recovered from such person along with applicable interest.

Section 201(3) puts forth limitation of 7 years in passing an order under Section 201(1) with respect to an assessee-in-default for failure to deduct the tax from a person resident in India. However, there is no express provision prescribing any time limit for passing such orders in cases where the payee happens to be a non-resident. Hence, the question that arises for consideration is whether proceedings under Section 201 against the resident payers can be initiated for an indefinite past period for non-deduction or lower deduction of taxes from payments made to non-residents?

This particular issue has come up before various courts and tribunals on multiple occasions. However, the opinion of courts on the issue is divided to say the least.

The Delhi High Court in Bharti Airtel Ltd. v. Union of India[2], ITAT Mumbai in Tata Power Co. Ltd. v. Income tax Officer[3], ITAT Bangalore in Mphasis Ltd. v. Deputy Director of Income tax[4] have held that the limitation period prescribed in Section 201(3) is equally applicable for payments made to non-residents as well.

However, the Bombay High Court in DIT v. Mahindra & Mahindra Ltd[5] has held that where no time limit is prescribed for taking an action under the statute, the action can be taken only within a reasonable time by harmoniously considering the scheme of the Act. Relying on the said decision, the Allahabad High Court in Mass Awash v. CIT[6] held that reasonable time cannot be uniformly prescribed for all cases, as it depends on host of factors. In that case, initiation of proceedings even after a lapse of 10 years was considered valid as there was reasonable explanation for delay. Similarly, Telangana High Court in Dr. Reddys Laboratories Limited v. DCIT[7] held that even though there is no limitation prescribed in the statute, the order under Section 201(1) must be made within a reasonable period, which will depend on the facts and circumstances of the case. The Court also held that a limitation period of 7 years as prescribed by the statute will be a useful guide to determine what would be a reasonable period in case of payments made to non-residents.

On a perusal of the aforementioned decisions, it is evident that a set of decisions cater to the line of thought that the time period prescribed under Section 201(3) must strictly apply to payments made to non-residents as well. However, there are other decisions that provide that since it may be administratively difficult to recover tax from the non-residents, proceedings must be concluded within a reasonable period.

Considering the divergent rulings, the battle between taxpayer and department on the issue of limitation is likely to continue unless settled by a legislative amendment incorporating a specific limitation period or by another decision of the Supreme Court.

In addition, there can also be scenarios where lower withholding has been carried out on the strength of certificate issued under Section 197 of the IT Act. In fact, the High Courts in Galderma Pharma SA v. Income tax Officer[8], Cotecna Inspection SA v. Income Tax Officer[9], Deccan Holdings BV v. Income Tax Officer[10] have held that certificate under Section 197 must be issued for lower rates in view of the MFN clause. While these decisions have also been reversed by the Apex Court, it raises another question as to whether tax deductors can be construed as assessees-in-default in these cases as well i.e., where lower withholding rate was applied considering the certificate under Section 197 of the IT Act. In our view, it is possible to take a stand that since the assessee relied on the certificate, which was valid at the time of withholding, the assessee cannot be treated as an assessee-in-default for the said period.


Section 201(1A) provides that the assessee-in-default is liable to pay simple interest computed as per the provisions of the said provision. In this regard, Circular No. 11/2017 issued by the CBDT provides that where any tax was not deducted on the basis of any order passed by the Jurisdictional High Court and subsequently such tax was held to be deductible by the Supreme Court, the Chief Commissioner of Income tax/ Director General of Income tax may grant waiver of interest.

In our view, the benefit of the above Circular can be availed by assessees in circumstances where assessees have been construed as ‘assessee-in-default’ consequent to judgment in Nestle SA, wherever such non-deduction by assessees is backed by a judgment of jurisdictional High Court.


Section 271C of the IT Act provides for penalty for failure to deduct tax at source. However, it is a settled position that penalty cannot be imposed on an assessee if he had a reasonable cause for non-deduction of tax at source. In view of the Nestle SA judgment, a view may be taken that penalty cannot be imposed on the assessee who has availed lower tax benefits under the MFN clause for the reason such non-deduction was on account of favorable High Court rulings.


Nestle SA judgment has paved way for many ramifications with respect to those assessees who have claimed tax benefits as per the MFN clause. In effect, the Nestle SA judgment in its entirety does not provide any relief for the assessees who have had a reasonable cause for not having deducted tax in the past.

However, the issues with respect to levy of interest, imposition of penalty and the period of limitation remain open, which will have to be legally agitated by assessees. Suitable clarification from the government either through legislative amendments or through circulars will go a long way in settling these open issues, rather than waiting for judiciary to settle these issues after a long drawn legal battle.

[The authors are Executive Partner, Associate Director and Associate, respectively, in Direct Tax Team at Lakshmikumaran and Sridharan Attorneys]



[1] TS-286-HC-2021(DEL).

[2] [2016] 76 taxmann.com 256 (Delhi).

[3] [2019] 111 taxmann.com 238 (Mumbai-Trib).

[4] [2022] 136 taxmann.com 160 (Bangalore-Trib).

[5] [2014] 365 ITR 560.

[6] [2017] 83 taxmann.com 306 (Allahabad)

[7] [2023] 155 taxmann.com 97 (Telangana).

[8] [2022] 138 taxmann.com 44 (Delhi).

[9] [2022] 136 taxmann.com 368 (Delhi).

[10] [2021] 133 taxmann.com 94 (Delhi).

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