The most favoured nation (MFN) clause in Tax treaties aims to provide a level playing field to treaty partners. Protocols to some of Indian Tax treaties had the MFN clauses with their different formulations that provided for similar scope and/or rate of tax with respect to certain streams of income if India extended more favorable terms to another jurisdiction which is a member of the Organisation for Economic Co-operation and Development (OECD).


The conundrum emerged when India treaty partners started invoking the MFN clause to avail the lower rates and restrictive scope which India had agreed with countries like Slovenia, Colombia and Lithuania which were not OECD member states at the time of signing of their respective Tax treaties with India, but subsequently became OECD members. Pursuant to some favorable High Court decisions upholding the availability of MFN clause benefit in such cases, the Central Board of Direct Taxes (CBDT) rolled out its circular clarifying its stance regarding the MFN clause applicability in Indian Tax treaties.


The hon’ble Supreme Court of India (Supreme Court), in the subject decision which is one of the most landmark judgments in the Indian context on the international tax landscape, aligned its decision with the Tax Department’s position based on the following premise:

  • the term ‘is’ in the phrase ‘is a member’ has present signification and thus, in the context, it is imperative that the subsequent treaty partner should be an OECD member at the time of signing of the Tax treaty for the earlier treaty beneficiary to claim parity;
  • on the aspect of automatic applicability of the MFN clause, it is vital to look into India’s practice and conduct of giving effect of the subsequent event through an express action i.e., a notification under section 90 of the Income-Tax Act, 1961 (ITA). In order to give effect to a Tax treaty/protocol thereto, which may have the effect of changing the existing law, a notification under section 90 of the ITA is a pre-requisite.


The Supreme Court’s decision, as it now stands, spells out the law of the land and India’s approach to treaty interpretation and would go to impact tax positions adopted by taxpayers based on the earlier favorable decisions which have now been overturned. The judgement (especially with respect to no automatic application of MFN and mandatory notification) has not been well received by the taxpayers and review petitions have been preferred against the judgement on various grounds before the Supreme Court.