How Supreme Court's Judgment In Nestle Case Is Linked To Switzerland Revoking India's MFN Status

Last week, Switzerland decided to suspend the Most Favoured Nation (MFN) treatment for India with effect from January 1, 2025. The Swiss authorities cited a judgment passed by the Supreme Court in 2023 in its decision to revoke India's MFN status.

“On the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of para. 5 of the Protocol to the IN-CH DTA is not shared by the Indian side. In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January 2025,” a Swiss government communiqué stated.

The Supreme Court's judgment came in an income tax dispute involving Swiss company Nestle and certain other connected cases. A bench comprising Justice S Ravindra Bhat and Justice Dipankar Datta ruled that a Double Taxation Avoidance Agreement (DTAA) cannot be given effect to by a court, authority or a tribunal unless it has been notified by the Central Government under Section 90 of the Income Tax Act(Assessing Officer Circle (International Taxation) New Delhi v. M/s Nestle SA C.A. No. 1420/2023 + ten connected appeals).

The MFN clause in the agreement with Switzerland provided for lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services. Also, the MFN clause required that if India was subsequently giving any similar concession to another country, which was a member of the Organisation for Economic Co-operation and Development(OECD), the same should be extended to Switzerland.

The Court held that when a third-party country enters into DTAA with India, it should be a member of OECD, for the earlier treaty beneficiary to claim parity. 

The Court held that unless the DTAA with Switzerland is amended and notified as per Section 90 of the Income Tax Act, it cannot automatically claim the benefits given to another country, which subsequently joined the OECD.

"The fact that a stipulation in a DTAA or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the DTAA of the first nation, which entered into DTAA with India. In such event, the terms of the earlier DTAA require to be amended through a separate notification under Section 90."

The Supreme Court delivered the judgments while allowing the appeals filed by the Income Tax Department challenging the Delhi High Court's judgment which allowed the MFN relaxation to Nestle, and certain French and Netherland companies.

The French company (Steria India) argued that a beneficial provision in the India-UK DTAA should be read as part of the original India-France DTAA.

Swiss and Netherlands companies sought for the application of the beneficial clauses in the DTAAs executed by India with Lithuania, Columbia and Slovenia which became OECD members later.

The Court, in its judgment, also took note of the consistent practice followed by India that after a DTAA, a separate statutory notification was issued.

"In India, either the treaty concerned has to be legislatively embodied in law, through a separate statute, or get assimilated through a legislative device, i.e. notification in the gazette, based upon some enacted law (some instances are the Extradition Act, 1962 and the Income Tax Act, 1961). Absent this step, treaties and protocols are per se unenforceable," the Court said.