One of the foremost challenges foreign investors face in India is the uncertainty in taxation measures. Taxation-related improbabilities arise not just due to the actions of the executive but also the judiciary. This makes doing business in India difficult for foreign players. The Supreme Court of India’s recent judgment in the Assessing Officer Circle (International Taxation) New Delhi vs M/s Nestle SA case, which disposed of 11 petitions involving corporations such as Nestle (a Swiss multinational company) and Steria (a European company) deserves to be seen in this light. The critical question in the case was whether the most favoured nation (MFN) clause in tax treaties such as the Double Taxation Avoidance Agreements (DTAAs) that India has signed, could be given effect in India without notification for the same under Section 90 of the Income-Tax Act. This provision allows India to sign tax treaties with other countries to avoid an income being taxed twice.
On Most Favoured Nation status
India’s bilateral DTAAs with the Netherlands, France, and Switzerland — all three countries are members of the Organization for Economic Co-operation and Development (OECD) — require imposing a 10% withholding tax (tax on dividends paid by Indian entities of foreign companies to the residents of Netherlands, France, and Switzerland). These DTAAs also contain an MFN provision. Thus, if India extends a preferential tax treatment to any third country “which is a member of the OECD”, the same treatment should be accorded to the Netherlands, France, and Switzerland under their respective DTAAs. India’s DTAAs with Slovenia, Colombia, and Lithuania have a lower withholding tax requirement of 5%.
