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October 25, 2023

India's Supreme Court rules 'notification' mandatory to invoke Most Favored Nations clause in India's tax treaties

  • The Indian Supreme Court has held that notification under the Indian Tax Laws is mandatory to give effect to any Indian tax treaty, or any Protocol that changes its terms or conditions, that has the effect of altering the existing provisions of law.
  • The ruling may impact all pending assessments and related proceedings irrespective of the stage of the particular dispute.
  • It may be necessary to assess the potential effects of the decision on previous tax positions taken by taxpayers and withholding agents.

Executive summary

On 19 October 2023, the Indian Supreme Court (SC) pronounced a significant ruling1 on the applicability of Most Favored Nation (MFN) clause found in some of India's tax treaties as under:

  • The SC ruled that to give effect to a tax treaty or any Protocol changing its terms or conditions, which has the effect of altering the existing provisions of law, notification under Section 90(1) of the Indian Tax Laws (ITL) is mandatory. With reference to MFN clause already agreed to as part of an existing treaty, the beneficial provisions entered with third country cannot be made automatically applicable unless a notification is issued.
  • The SC held that the beneficial treatment agreed with a third country can be applied by invoking the MFN clause, only if the third country was a member of Organisation for Economic Co-operation and Development (OECD), at the time of signing its tax treaty with India.

This Alert summarizes the SC ruling and relevant considerations for taxpayers.

Detailed discussion


  • India's tax treaties with certain OECD countries2 include an MFN clause, which provides that if after the original treaty (with the "first country") has entered into force, India enters into a tax treaty with an OECD member third country that provides a beneficial tax rate or restrictive scope for taxation of dividends, interest, royalties, etc., India must accord a similar benefit to the first country.
  • In recent years, India has entered into tax treaties with countries like Slovenia, Colombia, Lithuania (third countries) that apply a lower rate of tax to dividends than the earlier tax treaties with OECD members. However, these third countries were not OECD members when their respective tax treaties were entered into with India, becoming OECD members at a later date.3
  • There has been litigation regarding: (1) whether the beneficial tax rate agreed under the tax treaties with third countries could be applied to original tax treaties with the MFN clause; and (2) whether notification by the Government of India is required to confer the benefit of the MFN clause or the provisions operate automatically if any favorable treatment has been accorded to third State, subject to conditions stated therein.

In similar litigation, some state High Courts in India have ruled in favor of the taxpayers, concluding that applicability of the MFN clause is automatic and once the tax treaty (which contains the Protocol including the MFN clause) has been "notified," there is no need for the Protocol to be separately notified or for the beneficial provisions of the third State to be separately notified. The High Court in a separate ruling, also extended the benefit of a lower 5% withholding tax rate on dividend income as available in India's DTAAs with Slovenia/Lithuania/Columbia, though these countries became OECD members subsequent to signing of tax treaties.

The issue was submitted to the SC for consideration.

SC Ruling

The SC, after consideration of the issue presented, pronounced that to invoke the beneficial provisions of a tax treaty pursuant to the MFN clause, India is required to specifically issue a notification to this effect. Absent a specific notification reflecting consequential amendment, MFN provisions cannot be invoked.

Key findings from the SC ruling are:

  • The Indian Constitution enables the Indian Government to enter into international treaties; however, the treaty must be enacted by law or through legislation for it to be binding on Indian nationals if it restricts or affects the rights of citizens or others or modifies the law of India.
  • The Indian Government, in the past, has followed the practice of expressly issuing notification under Section 90 of the ITL to give effect to the MFN clause of the original country when a subsequent tax treaty results in a more beneficial arrangement with a third country.4
  • The interpretation and integration of treaties into domestic law are influenced by constitutional and political factors specific to each signatory. Domestic courts cannot approach treaty interpretation by merely applying blackletter law (i.e., well-established legal rules that are certain and no longer disputable).

Regarding when a third country should be an OECD member whose beneficial treatment is accorded by invoking the MFN clause, the Court held that the verb "is" used in this MFN clause — "third state which is a member of OECD" — is written in the present tense and, thus, to claim the favorable benefits at issue, the third State should be a member of OECD at the time it enters into a tax treaty with India.

Impact of the ruling

This is a significant ruling in the context of interpreting Indian tax treaties. Given that the decision was pronounced by the apex court, it will be regarded as the law of land and binding on all parties.

The SC decision is likely to affect claims that nonresident taxpayers have made regarding restrictive source taxation of interest, royalties, fees for technical services, dividends, etc. by relying on the MFN provisions and its scope as understood by lower courts.

As a binding SC decision, the ruling may impact all pending assessments and related proceedings irrespective of the stage of the particular dispute. It may be necessary to assess the potential effects of the SC decision on previous tax positions taken by taxpayers and withholding agents.

This impact analysis will need to take into account, among other things, potential risks of tax reassessment and applicable time limits, associated interest cost, penal consequences and associated reserves positions in the books.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India)

Ernst & Young LLP (United States), Indian Tax Desk

Ernst & Young Solutions LLP, Indian Tax Desk, Singapore

Ernst & Young LLP (United Kingdom), Indian Tax Desk, London

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor


1 TS-616-SC-2023, decision dated 19 October 2023.

2 E.g., Netherlands, France, Switzerland, Sweden, Spain, Hungary.

3 For example, India signed a DTAA with Slovenia in February 2005, but Slovenia became an OECD member in July 2010.

4 E.g., certain tax treaties, like the India-Netherlands tax treaty, India-France tax treaty and India-Switzerland tax treaty, wherein notification under Section 90 of the ITL has been issued giving effect to the beneficial treatment of tax treaties entered into by India with US, UK, Germany, etc. For example, Notification SO 693 (E) dated 30 August 1999 reduced the rate/scope of tax under Article 10, 11 and 12 of India-Netherlands tax treaty to give effect to the beneficial rate and scope of tax in the India-Sweden and India-US tax treaties.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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