Case Law (SC) – Claim of benefit of a Double Tax Avoidance Agreement (DTAA), or any protocol is permissible by a court, authority, or tribunal only if DTAA is notified u/s 90(1) of Income Tax Act.

AO v. NESTLE SA [2023 INSC 928] dated 19.10.2023

 Issue:

1.      Whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement (hereafter ‘DTAA’) was not an OECD member yet (at the time of entering into such DTAA);

2.      Whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued.

3.      Issuance of certificate for lower deduction of tax u/s 197 of the Act them to deduct withholding tax at a lower rate of 5% in consonance with the subject DTAA read with the Protocol.

4.      Applicability of principle of parity of DTAA with the DTAA of third State with whom India enters a Convention/DTAA who is a member of the OECD.

Holding:-

"V. Conclusions

88. In the light of the above discussion, it is held and declared that:

(a) A notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.

(b) 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.

(c) The interpretation of the expression “is” has present signification. Therefore, for a party to claim benefit of a “same treatment” clause, based on entry of DTAA between India and another state which is member of OECD, the relevant date is entering into treaty with India, and not a later date, when, after entering into DTAA with India, such country becomes an OECD member, in terms of India’s practice.

89. In view of the foregoing analysis and conclusions, it is held that the reasoning and findings in the impugned orders cannot survive; they are set aside."

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