MFN Clause Is Automatic: Nestle To Supreme Court In Tax Treaty Case
Most-favoured-nation clause is self-operating, self-executing, says Nestle as it seeks to pay 5% tax on dividend income.
Arguments resumed before the Supreme Court in a case that will have profound consequences for how India's tax treaties with the Netherlands, Switzerland, and France treat dividend income.
The primary issue is whether multinationals from these countries should pay tax on dividends at the rate of 10% or 5%. Since India's treaties with these countries contain a most-favoured-nation clause, the multinationals say that the beneficial 5% tax rate that exists in treaties with the countries of Slovenia, Lithuania and Columbia must also be applicable to them.
Since the Netherlands, Switzerland, and France are all members of the Organisation for Economic Co-operation and Development, the MFN clause makes sure that if India has signed another treaty with an OECD member that has a lower tax rate, the same will also apply to these three countries.
The tax department is seeking to apply a 10% rate on the dividend income of shareholders from these three countries.
The cases have reached the apex court after the tax department lost before the Delhi High Court. Briefly, the high court had concluded that tax treaties must be liberated from the technical rules, the department's denial of beneficial treatment of 5% withholding is "misconceived" and that no separate notification is required to apply the treaty to the domestic law.
All Treaty Provisions Duly Notified, Says Nestle
Arguing for Nestle SA, senior advocate Porus Kaka said a treaty or a protocol containing provisions has to be notified and not the individual provisions therein. And if a provision is automatic, it must be respected.
With respect to the Switzerland treaty, which applies in Nestle, not only are all the provisions duly notified, the Indian government has officially informed its Swiss counterpart that all legal requirements and procedures for giving effect to the protocol have been satisfied. This is a part of the treaty and the protocol, Kaka argued before the apex court.
The MFN clause, he said, is a self-operating and executing clause. Highlighting that if a self-executing clause needs a notification to be operative, then there will be no MFN clause that will ever apply because all countries that object to a particular interpretation will never notify it.
The argument of the other side is that let us renegotiate the automatic provisions, which are duly notified, signed and given effect to. If this is not a breach of treaty, then what is it?Nestle's Counsel
No court in India and across the world has ever allowed to say that a procedure must be created for a party who has signed a treaty that is self-executing so that renegotiations may be permitted with regards to a provision, Kaka argued.
He cited the Sanofi case, saying courts have not allowed substantive amendments in domestic law to override tax treaties. But here, it is being submitted that a procedural requirement must be created to override a tax treaty.
The counsel also relied on international jurisprudence to show that the courts are under an obligation within legitimate limits to interpret the municipal statute so as to avoid confrontation with the comity of nations.
The Vienna Convention on the Law of Treaties says that a treaty shall be interpreted in good faith in accordance with its ordinary meaning, and in the context and in light of the object of the treaty, according to Kaka.
"There is no requirement in the protocol that the country must be a member of the OECD on the date of the signature of the treaty and that this would amount to re-writing the clause."
No Notification Needed To Trigger MFN Clause: Steria
Counsel for Steria (India) Ltd. pointed out that the MFN clause in the India-France Double Taxation Avoidance Agreement, which applies to their case, is unconditional. No conditions are required to be fulfilled before the MFN clause gets triggered, apart from the basic requirement that another DTAA must be entered into by India with an OECD country that offers concessions or benefits to the party.
There is a long history of rulings of Indian courts that hold that the MFN clause is automatic and applies from the moment a DTAA is entered into with another OECD country.
Steria's counsel also pointed to rulings that say that no notification is required to trigger the MFN clause. And arguments to the contrary made by the tax authorities have been categorically rejected in the past.
The court will resume hearings in the case on Thursday.
