Analysing the Most-Favoured-Nation clause under Tax Treaty: Is India’s Divergent View Correct?

In Concentrix Services Netherlands B.V. v. Income Tax Officer (TDS) and ANR. (“Concentrix Services”) (22 April, 2018), the High Court of Delhi (“Court”),  decided an issue over the most-favoured-nation (“MFN”) clause in the protocol of the Double Taxation Avoidance Agreement (“DTAA”) in which the court using the principle of common interpretation (“principle”) relied upon a decree issued by the Netherlands. The principle dictates that the court of one contractual state should review the decision rendered by another contracting state and determine whether interpretation can be transmitted to maintain a balance of view. According to Lord Denning’s observations on the principle, “even if I disagreed, I would follow them in a matter which is of international concern.”[i] Later on 3 February 2022, the Indian Tax Department (“ITD”) released a circular clarifying its stand on MFN Clause. This circular clarification posed significant questions pertaining to the principle. The question at the centre of the dispute is whether the court was correct in applying the principle or not. This blog post will examine the aforementioned issue in the context of the relevant case.

To briefly summarise the facts of the case, under India- Netherlands DTAA to get MFN benefit, India should have signed DTAA with another country that must be an OECD member. India signed DTAA with Slovenia, Lithuania, and Columbia when they were not OECD members but became OECD members at a later point. According to the ITD, as these countries were not OECD members on the date when their treaties were signed, the benefit from these treaties cannot be allowed to India- Netherlands treaty. Concentrix Services filed a case before the Court and according to the Court, the best interpretative tool is to look at the intent of contracting states and how they have understood it. The Court looked at the decree issued by the Netherlands in 2012 and according to it as soon as Slovenia became an OECD member, the MFN clause was triggered [Para 17.5 & 17.6]. The court additionally referred to Klaus Vogel’s opinion[ii] , foreign rulings[iii] , and one Indian Supreme Court judgment[iv] [Para 17.7-17.9,18 & 19.2]. The Court in the end acknowledged that its judgment must be with the premise of the principle of common interpretation and the MFN benefit was granted. Consequently, a circular was issued by ITD clarifying that the unilateral decrees having a common view by the Netherlands, France, and Switzerland do not represent the shared understanding of MFN. These unilateral initiatives can, at most, convey the opinion of the other contracting states regarding the relief from taxes that must be paid in that individual nation. Further, since these unilateral communications have not been approved by India, they cannot affect the taxes that must be paid in India. A similar stand can be seen from the Mumbai Appellate Tax Tribunal in NGC Network Asia LLC v. DDIT, wherein they rejected a unilateral decree by the United States of America as it was not mutually agreed with India (the ruling was not related to the MFN).

Binding nature of a foreign unilateral decree upon India in a tax treaty

The stand taken by the ITD is at fault considering the fact that the MFN clauses in India are of two types, non-self-operational- which need activities like negotiation or/and notification between the two states and self-operational- which grants benefit automatically. The contracting states mentioned in the ITD circular, Netherlands, France, and Switzerland, have a self-operational clause which signifies that India and these states have agreed that any activity done by one state will be accepted by the other without any added step. Moreover, an additional activity that is mentioned in India’s Income Tax Act (“ITA”) under section 90(1) has a requirement that a separate notification is to be issued for a protocol (MFN clause) to be applicable but this position is well settled in Indian courts[v] that as protocols are an integral part, they are self-operational. ITD also overlooks the fact that India has signed a DTAA with Finland which, has wordings that “a notification is to be issued for the application of exemption or lower tax rate”. This reflects that the Indian government is well informed over the instances where they want additional activity by the contracting state and where they do not, looking at this accepting a unilateral decree seems to be correct. Further, ITD now taking a stand that India is not bound by any foreign unilateral decree seems to violate Article 26 of the Vienna Convention. This principle states that all international treaties “shall be carried out [by the signatories] in good conscience.” This signifies that the parties’ commitments and their legitimate expectations should be taken into account when interpreting or applying a treaty so as to prevent abusive execution. For the faithful and honest implementation of DTAA, the contracting nations must do their best to make the clause’s application as simple and practicable so that the potential application of an MFN clause which has been agreed upon by the parties is reached. Additionally, it seems odd when the ITD Circular was published as this document, was published in 2022, and purports to refute the interpretations of the MFN clause that were published by the Netherlands in 2012, which was 10 years earlier, France in 2016, which was six years earlier, and Switzerland in 2021. Notably, the Supreme Court of India in South Indian Bank Ltd. V. CIT has said that “just as the government does not wish for avoidance of tax, it is their responsibility to design a tax system for which a subject can budget and plan. If proper balance is achieved, unnecessary litigation can be avoided without compromising on generation of revenue” [Para 29]. The stand taken by ITD is totally opposite to these aims as businesses have been planning their tax structure for the past ten years but now taking this adverse view will cause huge harm to India’s reputation as a business-friendly nation. Even, in the field of public international law, the principles of estoppel and acquiescence are well known to apply to prevent a country from regaining the rights that result from their failure to clarify when a responsibility to clarify existed. Such an approach can be seen from the following- The Former Yugoslav Republic of Macedonia v. Greece (International Court of Justice Reports 2011); Subsequent agreements and subsequent practice in relation to the interpretation of treaties, and Resolutions adopted by the General Assembly of the United Nations on December 20, 2018 (Resolution No. A/RES/73/202).

Moreover, in GRI Renewable Industries ruling, which was rendered after the circular’s publication, did not concur with its guiding clarifications. The ruling reaffirmed that once a DTAA has been notified, no separate notification is required and authorities are not justified in denying the benefit. The ruling held that this circular could only be applied prospectively. Moreover, with this circular, a conflict arises for the ITD officers. As per Section 119 of ITA- orders, instructions issued by the ITD are binding on all revenue authorities but conversely, as per Agrawal Warehousing v. CIT, “the order of a tribunal is binding on all the revenue authorities functioning under their jurisdiction” [Para 6]. It’s a prominent principle that courts have the power to interpret the statutes and give clarifications on the issue, officers should be following the court orders ideally.


Tax treaties are signed on different political, social, and economic circumstances between the states making the mutual benefits granted to each country vary. Currently, no explicit definition is specified by OECD and UN model conventions on the concept of MFN treatment. With lack of guidelines, each state has been interpreting the MFN clause as per its understanding and policies. Applying the principle of common interpretation is advised in these situations because the taxpayers’ ability to structure their tax planning has been severely hampered by the various interpretations made by each nation. Further, looking at the publication issued by Switzerland wherein they have stated that they reserve the right to reverse their interpretation and reconsider the rates if there will be no guarantee of reciprocity of MFN interpretation by India. India should take into consideration that tax treaties go both ways and taking the above-explained stance will cause huge harm to India’s FDI and investor-friendly reputation.

While one may argue that India through its circular took its stand on the MFN clause but the complexity it brings, it is suggested that the circular should be re-evaluated. ITD with its current stand will cause great exhaustion of taxpayer and revenue authorities’ money and time due to endless litigation that will be coming up.

As India’s economy is growing at a global scale, the author suggests that India should not take a stand that is hostile to other countries. 

[i] Corocraft Ltd. C. Pan American Airways Inc. (1968) 3 W.L.R. 1273, 1283 (opinion of Lord Denning).

[ii] Klaus Vogel, ‘Double Tax Treaties and their Interpretation’, 1986.

[iii] Corocraft Ltd. V. Pan American Airways Inc., [1986] 3 W.LR. 1273, 1283; Fothergill v. Monarch Airlines 3 W.L.R. 209, 224 (1980).                  

[iv] Union of India and Anr. v. Azadi Bachao Andolan and Another, (2004) 10 SCC 1 [Para 130 &131].

[v] India- France DTAA: Steria (India) v. CIT (W.P.(C) 4793/2014, India- Switzerland DTAA: Torrent Pharmaceuticals Ltd. v. DIT (ITA No. 5369/Ahd/2004), India- Netherlands: Concentrix Services Netherlands B.V. v. ITO (W.P.(C.) 9051/2020).


Anuj Kumar

Anuj Kumar is a final-year law student at Vivekananda Institute of Professional Studies, New Delhi.

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