MFN clause: Review petition filed against SC ruling

A review petition is understood to have been filed in the Supreme Court over its ruling last month related to the most favoured nation (MFN) clause in double taxation avoidance agreements (DTAA).  

The matter pertains to treaties India signed with the Netherlands, France, and Switzerland that contained MFN clauses. These clauses stipulate that if India enters a treaty with another OECD member country that had lower tax rates, those would apply to entities from these three countries too. 

Setting aside an April 2021 ruling of the Delhi High Court, The Supreme Court in a verdict on October 19 held that a notification under section 90 of the Income tax Act, 1961, is a mandatory condition to give effect to a DTAA or any other protocol that can alter the existing provisions of law. Further, it had said that a claim under the MFN clause of a treaty with an OECD member country that relies on a third OECD member’s tax treaty with India is valid only if the third country was a member of OECD at the time of entering into its DTAA with India. 

This is expected to have far-reaching implications for multi-national companies from countries like France, Netherlands and Switzerland that are operating in India. 

The MFN clause is not restricted only to providing favourable tax rates alone, but also extends to restriction on scope of the incomes such as royalty, FTS, and other income. “Many taxpayers have taken the benefit of lower rate of dividend taxation of 5% as provided in the DTAA between India and the respective SLC countries pursuant to the MFN clause,” a PwC note had said.  

The decision is expected to lead to the revenue department reopening past cases and seeking tax as well interest on them.  

Experts noted that a filing of a review petition was on expected lines given the impact of the case.  

Rohinton Sidhwa, Partner, Deloitte India said, “It was highly likely that a review petition be filed because of some gaps in the judgement and the fact that it concurred that a notification was necessary for implementation.” 

He also noted that since several high courts had ruled in favour of taxpayers, the amounts of tax payable now are significant. “There are, however, provisions for abatement of interest for such judicial overturns under administrative circulars. The chances of a review of a SC Judgement are extremely slim based on precedence,” he said. 

Sandeep Sehgal, Partner-Tax, AKM Global said the ruling given by the Supreme Court will have a far-reaching impact going forward. “India or the affected countries may initiate renegotiation in the tax treaty but any change will be prospective only and hence the past transactions will not be protected. The demands for tax and interest for that period can be raised where such MFN benefit has been claimed and hence to get protection against that, the MNEs are seeking to have a relook from the Supreme Court,” he said.