One of the major challenges faced by foreign investors in India is uncertainty about Tax measures. The impossibility related to taxes stems not only from the actions of the executive authority, but also from the judicial authority. This makes doing business in India difficult for foreign players. The recent judgment of the Supreme Court of India in the case of Assessment of Administrators (International Taxes) New Delhi v. Nestlé SA, held that 11 petitions relating to companies such as Nestlé (a Swiss multinational) and Steria (a European company) deserve to be viewed from this perspective. 

The important question in this case is whether the Most Favored Nation (MFN) clause in tax treaties such as the Double Taxation Avoidance Agreement (DTAA) signed by India, can be triggered in India without notification being required under Section 90 of the MFN Act. Represent. Income tax law. This provision allows India to sign tax treaties with other countries to avoid double taxation on income.

Regarding the most popular national regulations

India’s bilateral DTAAs with the Netherlands, France and Switzerland (the three member states of the Organization for Economic Co-operation and Development (OECD)) require a 10% withholding tax (a tax on dividends paid by Indian entities from foreign companies). for foreign companies). Residents of the Netherlands, France and Switzerland). These DTAAs also include most-favored-nation provisions. So, if India grants tax incentives to any third “OECD member” country, the same will also be available to the Netherlands, France and Switzerland under their respective free trade agreements. DTAAs in India, along with Slovenia, Colombia and Lithuania, have a lower withholding tax requirement of 5%.

When India signed the DTAA with these countries, these countries were not members of the OECD but joined the group later. When the case was initially brought before the Delhi High Court, it was held that under the MFN clause, the preferential tax provided for, for example, in the India-Slovenia DTAA would extend to the India-Netherlands DTAA. However, the Supreme Court overturned this decision holding that at the time of signing of the DTAA between India and the Netherlands, Slovenia was not a member of the OECD. Therefore, the advantages enjoyed by Slovenia, which later became a member of the OECD, do not apply to the DTAA between India and the Netherlands. 

This reasoning is speculative because it freezes the terms of the treaty in time. For example, there is nothing in the text of the India-Netherlands DTAA to clarify that the phrase “member of the OECD” was intended for countries that were members on the date of signing of the treaty. What is surprising is that the Supreme Court used the national interpretation method to interpret a term contained in an international treaty. This interpretation defeats the purpose of including non-discriminatory standards such as most-favored nation treatment in economic treaties. A treaty’s MFN clause ensures that future benefits granted by a treaty country to a third country are automatically extended to that country’s treaty partners.

Duality strikes again

The Supreme Court held that for the MFN clause in the DTAA to become effective, notification under Section 90(1) of the Income Tax Act is necessary and mandatory. Hence, the Court upheld the principle of duality, which stipulates that international law applies at the national level only after it is translated into domestic law through legislation. While it is true that the Indian Constitution provides for such formal duality, the Supreme Court has moved away from this principle and moved towards the unilateral tradition of incorporating international law into the country’s legal system, even if not explicitly incorporated, provided that international law is Respect the law. Does not conflict with internal law.

This principle has been established in cases such as PUCL v. India, Vishakha Vs. State of Rajasthan and Puttaswamy Vs. Indian Union. The starting point in these cases is the “presumption of compatibility” or “presumption of consistency” between domestic law and international law. This presumption can only be rebutted if national law clearly conflicts with international law. In other words, wherever possible, domestic law should be interpreted in a way that does not conflict with India’s obligations under international law. This approach ensures that courts apply progressive international law to protect the rights of citizens and individuals even in cases where the legislative and executive branches have not taken steps to transform it into water law in any way.

The Court’s interpretation allows the executive to avoid its obligations under international law by not publishing relevant notifications at the national level. This not only excuses violations of international law, but also leaves India vulnerable to international claims under other international law instruments such as bilateral investment treaties. This ruling once again confirms the statement that the Supreme Court is supreme because it is final, not because it is infallible.

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