DOUBLE TAXATION AVOIDANCE AGREEMENTS: INTERPRETING INDIA’S STANCE IN LIGHT OF ‘ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI V. M/S NESTLE SA2023 INSC 928’ – Arlene Noronha

Introduction

Double Taxation Avoidance Agreements (DTAAs) are the linchpins of modern international trade, serving as critical instruments for nations to foster economic collaboration while mitigating the burden of double taxation.¹ These agreements, akin to the way treaties are the currency of international relations, are essential in a globalized economy where taxesare collected through both direct and indirect means. In India, the Income Tax Act of 1961 stands as the foundational legal framework, dictating the interpretation and application of tax laws.²

The Supreme Court’s landmark decision in Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi Vs. Nestle SA 2023 INSC 928 provides an interlinked analysis of the interplay between DTAAs and domestic tax legislation. This case comment aims to dissect this ruling, focusing on the India-Switzerland DTAA, particularly the Most Favoured Nation (MFN) clause, to illuminate its implications for taxation, statutory interpretation, and the broader landscape of India’s bilateral relations with Switzerland.

Facts of the Case

This case arises out of a disagreementin the manner of taxation applicable to the dividend distributed by Nestle India to its Swiss parent, Nestle SA. The core area of dispute was the application and interpretation of the MFN clause in the Double Taxation Avoidance Agreement (DTAA) entered into between India and Switzerland. The appellant being the Assessing Officer Circle (International Taxation) and the respondent being Nestle SA.

The respondent had claimed for favourable tax rates on the dividend income based on the MFN clause incorporated in the DTAA. This was further bolsteredby the availability of similar provisions in the DTAA of India with other OECD (Organisation for Economic Co-operation and Development) member countries. The respondent’s stance was that the clause in the DTAA essentially enabled Switzerland to reap the beneficial tax rate or restricted fee that was negotiated between India and a third nation, which was also a member of the OECD, in the respective DTAA with the third nation.

Now, India entered into DTAAs with Lithuania on 26 July 2011 and with Colombia on 13 May 2011.Now there was alower dividend tax rate of 5% for shareholding above 10% present in India’s DTAA with Lithuania. The respondents claimed that this should retrospectively apply on the respondent, since 5^th July 2018, as that was when Lithuania joined the OECD.

And, in a similar manner, the respondent, claimed that India’s DTAA with Colombia provides fora general residual tax rate at 5% in the source state,shouldalso retrospectively applyfrom 28th April 2020, when Colombia joined the OECD.

The membership of Lithuania and Colombia would immediately attract the application of the MFN clause w.r.t Switzerland automatically. Thus, at a lower rate to their dividend income or a more restricted fee would be the appropriate rate applicable on Switzerland.

The appellant however took a stand that the benefits of MFN clause could not be read with automatic extension, in the manner the respondent was readingthe law. It is at this juncture where the interpretation of the Income Tax Act of 1961 comes into play. The appellanttook the view that the provision, including the MFN clause, has to be mandatorily notified under Section 90 of the Income Tax Act, 1961, to be made effective in India. And since no notification was issued with respect to the particular benefit as claimed by the respondent, there would be no automatic application in this instance.

The Court through its judgment highlighted that there were two primary principles that had to be fulfilled in order for the respondent to receive the benefits of the third-party treaty:

1. “First, the third State with whom India enters into a Convention/DTAA should be a member of the OECD.
2. Second, India should have, in its Convention/DTAA, executed with the third State, limited its rate of withholding tax, on subject remittances, at a rate lower or a scope more restricted, than the rate or scope provided in the subject Convention/DTAA (that is, the DTAA between India and Switzerland).”

Following the fulfilment of these conditions, the same withholding tax rate or scope as specified in the executed Convention/DTAA will apply as of the date the Convention/DTAA between India and a third State enters into force.