Focus Point

MFN clause under tax treaties and its current position

What is MFN clause?

In legal terms, the Most Favored Nation (MFN) clause in international trade agreements mandates that a country must treat all its trading partners equally, offering them the same trade benefits and concessions granted to its most favored trading partner. This principle upholds fairness and non-discrimination in international trade.

If, after the date of entry into force of the tax treaty between India and the original state, India enters into a tax treaty with a third state that is a member of the Organisation for Economic Co-operation and Development (OECD), providing a beneficial rate of tax/restrictive scope, then the MFN clause accords a similar benefit to the original state.

Issues with invoking MFN clause

The key questions that always revolved around the MFN clause inter alia included - whether a separate notification was required for the application of MFN clause and whether the third state would have to be an OECD member at the time of entry into force or at the time of the time of availing MFN benefit.

Position till now

The interpretation of the MFN clause has been a subject of dispute for some years, particularly concerning the issues discussed above. Some High Court rulings1 favored taxpayers and concluded that the MFN clause is typically an inherent component of a treaty already notified, usually within a protocol and thus, a separate notification is not required. 

Then, in February 2022, the Central Board of Direct Taxes (CBDT) issued a Circular3 that contradicted all the rulings thus far and stated that to apply the MFN clause, the second treaty should be made with a third state that is an OECD member and signed after the initial treaty with the first state, accompanied by a separate notification under Section 90(1) of the Income-tax Act (ITA), 1961, from India.

However, even after the circular, certain rulings3 held that once notified, the Double Taxation Avoidance Agreement (DTAA) automatically includes all integral components, eliminating the need for additional notifications for the individual limbs of the DTAA.

Supreme Court's verdict

On 19 October 2023, the Honorable Supreme Court of India issued a landmark ruling regarding the applicability of the MFN clause, fundamentally altering the interpretation of Double Taxation Avoidance Agreements (DTAA). This decision marks a significant departure from established legal precedents.

The Supreme Court examined the MFN clause in the tax treaties between India and the Netherlands, India and France, and India and Switzerland, among other treaties. It established that a separate notification under Section 90(1) of the ITA is necessary to implement a tax treaty or its Protocol when it alters the existing provisions of the law, changing terms and conditions. It has also emphasized the existence of a pre-condition that the third state is required to be an OECD member as on the date of the signing of the treaty and not on any future date.

A unilateral notification issued by the second state will not bind Indian Revenue Authorities. The Swiss, Dutch and French authorities have issued such notifications.

Repercussions of the Supreme Court's decision

The above judgment has unsettled the otherwise settled position for availment of the benefit of the MFN clause, has given rise to certain questions and has engendered legal inquiries that remain open-ended in nature, such as:

  • Whether the decision will have retrospective implications?
  • How should companies that have previously availed benefits under different terms respond?
  • What will be the tax authorities' stance on previously resolved cases?
  • Will taxpayers amend their tax filings to date and make additional tax payments in accordance with the revised decision?
  • What about the settled position in cases where the decision of the High Court4 was ruled in favor of the assessee and the same was not challenged by the Revenue?

It will be interesting to see time answer these questions as and when the position evolves and the authorities/ taxpayers take the next steps.

To view the full article, click here.


1. W.P.(C) 4793/2014 dated 28 July 2016, (2016) 386 ITR 390 (Delhi): Judgment dated 22 April 2021 passed by Delhi HC in WP (C) No. 9051/2020 and connected matters, W.P.(C) No. 3243 of 2021 decided on 4 June 2021

2. Circular 3/2022 dated 3 February 2022

3. ITA No.202/PUN/2021

4. 263 CTR 549 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.