ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI vs. M/S NESTLE SA

C.A. No.-001420-001420 - 2023Supreme Court2023 INSC 92819 October 2023Bench: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE DIPANKAR DATTAAuthor: HON'BLE MR. JUSTICE S. RAVINDRA BHAT59 pages
For Petitioner: RAJ BAHADUR YADAV
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court held that a notification under Section 90(1) of the Income Tax Act, 1961, is a mandatory condition for courts, authorities, or tribunals to give effect to a DTAA or its protocol that alters existing provisions of law. The Court clarified that the fact a stipulation in a DTAA or Protocol with one nation requires the same treatment as a subsequent DTAA with another OECD member country does not automatically integrate such a term. Instead, the terms of the earlier DTAA require amendment through a separate notification under Section 90. The interpretation of the word 'is' in MFN clauses signifies present tense, meaning the relevant date for claiming benefit based on a third country's DTAA is when that country entered into a DTAA with India, not a later date when it became an OECD member. The Court found that India's treaty practice consistently requires notification for consequential amendments. Consequently, the reasoning and findings in the impugned orders were set aside, and the revenue's appeals were allowed. The Court expressly left undecided the interpretation of the India-Spain DTAA.

What were the facts?

This batch of Supreme Court appeals concerns the interpretation of Most Favoured Nation (MFN) clauses in Double Tax Avoidance Agreements (DTAAs) between India and OECD member countries, specifically India-Netherlands, India-France, and India-Switzerland. The core issue is whether a more favourable tax rate or definition of 'fees for technical services' (FTS) granted to a third OECD country can be automatically applied to an earlier DTAA, or if a separate notification under Section 90 of the Income Tax Act, 1961, is required. In the Steria India case, the Authority for Advance Ruling (AAR) held a notification was necessary, but the Delhi High Court reversed this. For the India-Netherlands DTAA, assessees sought a 5% withholding tax rate on dividends based on an MFN clause, but were issued certificates at 10%. They challenged this before the Delhi High Court, which allowed their petitions.

What were the issues?

1. Whether a Protocol to a Double Tax Avoidance Agreement (DTAA) is considered part of the DTAA itself for the application of a Most Favoured Nation (MFN) clause, and if a separate notification under Section 90 of the Income Tax Act, 1961, is required to give effect to the MFN clause in the Protocol. 2. Whether the lower withholding tax rate or restricted scope of royalty/FTS granted to a third OECD country under a subsequent DTAA can be automatically applied to an earlier DTAA between India and another country, or if a separate notification under Section 90 of the Income Tax Act, 1961, is mandatory. Assessee's Contentions: The assessees argued that a Protocol is an integral part of the DTAA and does not require a separate notification for the MFN clause to be operationalized. They contended that subsequent beneficial provisions granted to other OECD countries should automatically apply to the earlier DTAA due to the MFN clause, citing rulings in Steria (India) Ltd. v. Commissioner of Income-Tax, Apollo Tyres Ltd. v. Commissioner of Income Tax, International Taxation, and EPCOS Electronic Components S.A. v. Union of India. Revenue's Contentions: The revenue contended that a separate notification under Section 90 of the Income Tax Act, 1961, is a mandatory condition for giving effect to any change in the DTAA or its Protocol that alters existing provisions of law, including the application of MFN clauses.

Which sections of the Income-tax Act were involved?

Section 90

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Cause title — parties, addresses and appearances
2023 INSC 928 1 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO(S). 1420 OF 2023 ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI …APPELLANT(S) VERSUS M/S NESTLE SA …RESPONDENT(S) WITH Civil Appeal No. 1423/2023, Civil Appeal No. 1421-1422/2023, Civil Appeal No. 1424/2023, Civil Appeal No. 1425/2018, Civil Appeal No. 1426/2023, Civil Appeal No. 1427/2023, Civil Appeal No. 1428/2023, Civil Appeal No. 1429/2023, Civil Appeal No. 1430/2023, Civil Appeal No. 1431/2023, Civil Appeal No. 1432/2023

J U D G M E N T S. RAVINDRA BHAT, J.

Table of Contents I.

Facts...........................................................................................................................2 II.

Arguments of parties..................................................................................................6 A.

Revenue’s contentions.........................................................................................................6 B.

Contentions of the assessees/Respondents.......................................................................12 III.

Relevant statutory provisions................

The order continues below.

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