Assessing Officer Circle (International Taxation) Vs Nestle SA

CITATION	Civil Appeal No(S). 1420 of 2023
DATE OF JUDGEMENT	19th October, 2023
COURT	Supreme Court of India
APPELLANT	Assessing Officer (I. T.)
RESPONDENT	Nestle SA
BENCH	Dipankar Datta, S. Ravindra Bhat

INTRODUCTION:

The case at hand revolves around significant disagreements over the interpretation of multiple Double Taxation Avoidance Agreements (DTAAs) and its Protocols, with particular emphasis on the DTAAs between India and France and India and the Netherlands. The main point of contention is whether the Most Favored Nation (MFN) clause and other Protocol provisions automatically apply or require supplementary notifications under Section 90 of the Income Tax Act. Concentrix Services Netherlands BV and Optum Global Solutions International BV requested lower withholding tax rates under the India-Netherlands DTAA, while Steria India contended that the narrow definition of “fees for technical services” from the India-UK DTAA should be taken into consideration under the India-France DTAA.

In its rulings, the Delhi High Court maintained that protocols are essential to treaties and that particular announcements are not necessary for the MFN clause to be applied. An appeal was filed after the revenue contested these rulings. The appeals mark a pivotal moment in the legal process when the court’s interpretation of treaty articles and the need for further notifications would probably have wider effects on the implementation of the DTAAs in India.

FACTS OF THE CASE:

1. In the case of Steria India, a significant dispute arose regarding the interpretation of Clause 7 of the Protocol to the India-France Double Taxation Avoidance Agreement (DTAA). 
2. Steria argued before the Authority for Advance Ruling (AAR) that the more restrictive definition of ‘fees for technical services’ in the India-UK DTAA should be considered as part of the India-France DTAA. The AAR disagreed, stating that the Protocol could not be treated as forming part of the DTAA itself and that a separate notification under Section 90 of the Income Tax Act was required to incorporate the more restrictive provisions. However, the Delhi High Court, in a writ petition, reversed this decision, holding that the Protocol is considered part of the treaty and does not require separate notification for the application of the Most Favored Nation (MFN) clause.
3. In another set of facts involving the India-Netherlands DTAA, Concentrix Services Netherlands BV and Optum Global Solutions International BV sought lower withholding tax rates of 5% under Section 197 of the Income Tax Act in 2020. Certificates were issued with a 10% withholding tax rate, valid until March 30, 2021. The assessees argued that, based on the Protocol and preface of the India-Netherlands DTAA, the lower rate of 5% should apply, citing the principle of parity with DTAAs executed with other OECD member countries. 
4. The Delhi High Court, in its judgment, allowed the writ petitions, emphasizing that the conditions stipulated in the Protocol’s Most Favored Nation clause were satisfied, and the lower rate should automatically apply without requiring a fresh notification. 
5. This interpretation by the High Court is consistent with its previous decisions in Steria and Concentrix, leading to an appeal by the revenue against these judgments.

ISSUES RAISED:

The prime issues revolved and settled by the Supreme Court in this case are:

1. Whether the MFN clause in the protocol to the India-Switzerland DTAA mandates that the lower tax rates in subsequent DTAAs entered into by India with other OECD countries will automatically apply to remittances covered under the India-Switzerland DTAA. 

2. Whether the condition of the third state being an OECD member at entry into DTAA with India or subsequent accession is relevant or the status at the time of claim for benefit is relevant.

3. Interpretation of the phrase “which is a member of OECD” in the protocol’s MFN clause – whether it refers to status at the time of DTAA execution or when benefit is claimed.

4. Whether the Netherlands’ interpretation of a similar clause through an executive decree can be referred to for interpretation of the India-Switzerland DTAA protocol. 

CONTENTIONS OF THE APPELLANT:

1. The Revenue asserted that under the Indian Constitution, Parliament has exclusive power to legislate on any treaty entered into by India as per Articles 253 read with the Seventh Schedule. Without Parliamentary legislation, treaties are not enforceable. India follows the “dualist” approach where treaties need domestic legislation to be enforceable unlike “monist” countries. 

2. Relying on decisions in Gramaphone Co and Azadi Bachao cases, it is argued that without enabling legislation, treaties do not create rights or liabilities for third parties. Section 90 requires notification to give effect to treaty obligations. Mere treaty entry does not give rise to any tax rights without law. 

3. The appellant emphasized that notification is the trigger for MFN benefits when India enters into a new treaty with a country that was an OECD member at the time of its treaty with India, provided the new treaty provides lower taxation. But notification is still required to give effect as per Section 90. 

4. Treaty practice with France, Netherlands, and Switzerland cited – protocols and notifications omit to extend benefits automatically based on other countries gaining OECD membership later. For example, the France Protocol 2012 did not cite Slovenia joining the OECD in 2010. 

5. It was established that the Protocol and notification dated 30.08.1999 for the India-Netherlands treaty was triggered by benefits given to the US, Germany, Sweden, and the UK in their respective treaties with earlier dates, showing automatic benefits not granted. 

6. Unilateral foreign decrees cannot bind Indian authorities. It is urged by the appellant that the impugned judgment over-relied on such decrees without verification as per Indian law. 

7. The submission emphasized that the interpretation of ‘is a member of OECD’ refers to status at the Indian treaty signing date based on consistent practice. It further asserted that linguistic interpretation of ‘is’ cannot overlook context as per VCLT principles applied in Indian cases. MFN clause wording refers to OECD membership at the signing date of the relevant Indian treaty.

CONTENTIONS OF THE RESPONDENT:

1. It was urged by the assessee that Section 90 only requires notification of a treaty/protocol and not separate notification of each clause. Plain reading shows it doesn’t require separate notification for automatic amendments due to self-operative MFN clauses. 

2. The argument presented that the India-Netherlands MFN clause in the notified protocol has no requirement of separate notification for benefits to apply automatically as a consequence. Unlike MFN clauses in India-Finland and India-Philippines treaties which require informing another country, the subject MFN clause applies benefits automatically without separate negotiation or notification.  

3. It was asserted that unilateral foreign decrees are not binding on Indian courts but provide the context of understanding in other countries. Netherlands decrees of 1998, 1999, 2012 clarify MFN clause is automatic, to be given effect from the date of the relevant treaty’s entry into force. 

4. It is contended that Revenue cannot override clear treaty language through unilateral past administrative practices or executive decrees. As per the Agricas LLP case, domestic law cannot breach treaty obligations. 

5. Revenue’s 30.08.1999 notification for the India-Netherlands treaty was unilateral without bilateral agreement on contents and differed from bilateral protocols. Dutch communication of 18.11.1999 notes differences in understanding on a limited aspect. 

6. The argument put forth is that ‘Is a member of OECD’ in the MFN clause refers to membership only when the benefit is invoked, not continuously. Otherwise same interpretation for ‘is a resident’ in Article 10 would require continuous residence. 

7. The India-Lithuania treaty (2011) and India-Colombia treaty (2011) provided lower dividend rates when those countries joined the OECD in 2018 and 2020 respectively, triggering MFN benefits automatically per the third protocol to the India-Switzerland treaty (2011). Furthermore, the objective of the third protocol’s change in wording from “shall enter negotiations” to “shall also apply” was to assure automatic lower rate benefits to Switzerland as given to other OECD member treaty countries. 

8. The argument emphasized that relevant foreign countries need only be OECD members when benefits are invoked from the MFN clause, not at all before the treaty signing dates. Revenue denied benefits only based on membership at the India-Netherlands treaty signing.

JUDGEMENT:

The Supreme Court made it clear that for any court, authority, or tribunal to adopt a Double Taxation Avoidance Agreement (DTAA) or any protocol that modifies its terms, notice under Section 90(1) is not only necessary but also mandatory. This obligation becomes particularly crucial when such alterations have the effect of modifying existing provisions of the law. Furthermore, the court clarified a nuanced point: just because a DTAA or Protocol calls for similar treatment to another country (that is, a member of the OECD) after it enters into a treaty with India, it does not mean that other countries will automatically benefit from the same treatment. In these situations, the court stressed, it is necessary to give separate notice under Section 90 to change the terms of the previous DTAA. The current interpretation of the term “is” means that, for a party to assert the advantages of a “same treatment” clause resulting from the entry of a DTAA between India and another state (whether or not it is an OECD member), the date of the treaty’s signing with India is relevant, not the date on which the other state joins the OECD.

In light of the comprehensive analysis and conclusions presented, the court has set aside the reasoning and findings in the impugned orders. The appeals by the revenue have succeeded, and no costs have been ordered. Separately, the Court decided that Case No. 1428/2023, related to the India-Spain DTAA, will be addressed in a separate proceeding before the appropriate court.

ANALYSIS:

The Supreme Court decided in favor of the appellant, or tax authorities, in the matter of Assessing Officer Circle (International Taxation) vs. Nestle SA. The court based its decision on significant precedents and principles related to interpreting Section 90(1) of the Income Tax Act, 1961, and determining whether it is constitutional under Article 253 of the Constitution. Under Section 90(1) of the Income Tax Act, the court stressed, that a new notification is necessary before any Double Taxation Avoidance Agreement (DTAA) or its protocol can be implemented. The Union is the only entity authorized to participate in DTAA, but Parliament has the final say over whether or not these agreements become law. This was highlighted by the court. Since these agreements change Indian law or affect people’s rights, they do not automatically apply to Indian citizens in the absence of legislative action.

The court’s reasoning drew upon established principles from previous judgments, including the distinction between the formation and performance of treaty obligations, as elucidated in cases such as W.B. State v. Jugal Kishore More and Maganbhai Ishwarbhai Patel v. Union of India. The necessity of legislative action was again underlined since treaties that affect subject rights must amend or add to existing laws.

Nestle SA, the respondent, contended that the benefits of Most Favored Nation (MFN) clauses did not require a separate notification because they were self-operating. Based on the constitutional framework and the interpretation of Section 90(1), the court dismissed this argument, holding that a notification is necessary for the implementation of MFN clauses.

CONCLUSION:

The court’s ruling strengthens the tax authorities’ stance by enabling them to go after underpaid taxpayers who had previously claimed lower dividend tax rates under the MFN provision without requiring additional notification. The importance of legal formalities in implementing international accords within the domestic legal framework is highlighted by the court’s reliance on recognized principles regarding treaty-making processes, statutory interpretation, and constitutional provisions. The decision establishes a standard for how the DTAA’s provisions should be interpreted and whether Indian courts can enforce them.

REFERENCES:

1. https://indiankanoon.org/doc/111682906/
2. https://taxguru.in/income-tax/sc-ruling-mfn-clause-nestle-sa-case-impact-international-taxation.html
3. SSC Online

This article is written by Ipshita Adhikari, a student of IMS Unison University, Dehradun; an Intern at Legal Vidhiya.

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