How The Tax Department Argued The MFN Clause Dispute In Supreme Court?

In a significant win for the tax department last week, the Supreme Court ruled that a treaty is enforceable in Indian courts as long as a notification is issued to give it effect. If there is no notification, the treaty is not enforceable, the court said.

The court also concluded that a party could only claim equal treatment based on a treaty between India and another OECD member state if the other member state was an OECD member at the time the treaty was signed with India.

In doing so, the top court has denied a favourable tax rate to several multinationals from Switzerland, the Netherlands, and France.

At the centre of this dispute lay the issue of taxing dividend payouts at a rate of 10% versus 5%.

The top court was dealing with the interpretation of the '' clause, which is found in multiple Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development.

Multinationals from the jurisdictions in question contended before the court that because French, Swiss, and Dutch treaties contain the MFN clause, the 5% withholding rate in treaties with Slovenia, Lithuania, and Colombia should also apply to them.

The MFN clause says that if India has signed another treaty with an OECD member that has a lower tax rate, the same shall also apply to Dutch, Swiss, and French resident firms.

The tax department, however, had reservations about the stand taken by these multinationals.

Appearing for the department, Additional Solicitor General N. Venkatraman had argued that for a taxpayer to draw a concessional benefit under the income tax law, the concession must come through a notification.

The claim that a notification is automatic and the claim that a notification comes into force automatically are both false, Venkatraman said.

It was vehemently suggested that international treaties and conventions are not automatically assimilated into domestic law upon their ratification.

The department argued that the mere fact that India entered into DTAAs with Slovenia, Lithuania, and Colombia and that they became members of the OECD after the conclusion of the treaty could not lead to claims that similar or identical treatment had to be extended to Swiss, Dutch, and French tax residents.

Highlighting that a treaty should be interpreted ordinarily, it was stated that treaties are drafted by diplomats and care has to be taken to not render any word, phrase, or sentence redundant, especially where such redundancy would lead to a manifestly absurd situation.

Consequently, the department stated that the language of the treaties with the Netherlands, Switzerland and France must be interpreted to mean that the MFN clause gets triggered only if India has signed a beneficial treaty with any other country that was an OECD member at the time.

Since Slovenia, Lithuania and Columbia became OECD members much later, the benefit of the lower rate in their treaties cannot apply to the Dutch, Swiss and French treaties, it was argued.