Today's Editorial

Today's Editorial - 08 November 2023

A verdict that hampers international law obligations

Why in News?

Recently, in the Assessing Officer Circle (International Taxation) Vs Nestle India case, the Supreme Court passed a judgment and disposed of 11 petitions involving corporations such as Nestle (a Swiss multinational company) and Steria (a European company).

  • The case concerned interpreting the Most Favored Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA). 
  • As per the author, the decision is a setback to the progressive judicial journey unleashed by cases such as Vishakha to take international law seriously.

What is DTAA?

It is a provision that allows India to sign tax treaties with other countries to avoid being taxed twice. India has DTAA with 85 countries till June 2023. 

About Judgment: 

  • The question in judgment 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 or in simple terms it addressed whether the MFN clause should be automatically enforced or if it requires a separate notification. 
    • To this question, the Supreme Court answered that treaties and protocols do not automatically confer rights upon the parties upon India’s entry into them. 
  • The court emphasised that appropriate notifications under Section 90(1) are essential. It emphasises the need for clarity and a strict legal process to ensure that international tax agreements are adhered to.

The story/background behind the case: 

  • India has Double Taxation Avoidance Agreements (DTAAs) with various countries, including the Netherlands, France, Switzerland, Slovenia, Colombia, and Lithuania. These DTAAs govern the taxation of dividends paid by Indian entities to residents of these countries. 
    • These DTAAs with the Netherlands, France, and Switzerland also contain a Most Favored Nation (MFN) provision. 
    • This provision states that if India extends a preferential tax treatment to any third country member of the OECD, the same treatment should be accorded to the Netherlands, France, and Switzerland under their respective DTAAs. 
  • Slovenia, Colombia, and Lithuania were not OECD members when they signed their DTAAs with India. However, they later became OECD members, which triggered the MFN provision in their respective DTAAs. 
  • Initially, the Delhi High Court held that under the MFN provision, the preferential tax treatment in, for example, the India-Slovenia DTAA should extend to the India-Netherlands DTAA. 
    • However, the Supreme Court overruled this decision, holding that the benefits extended to Slovenia (a later OECD member) do not apply retroactively to the India-Netherlands DTAA.


  • This ruling has far-reaching implications for international taxation in India, highlighting the importance of proper legal procedures and notifications in international agreements. 
  • 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 recent judgment in the Assessing Officer vs Nestle case rationalises a violation of international law and leaves India vulnerable.

Criticism Points: 

  • The Supreme Court held that, to give effect to the MFN provision in the DTAA, a notification under Section 90(1) of the Income Tax Act is necessary and mandatory. 
    • This reflects a dualist approach in international law, where international agreements are not enforceable domestically until they are transformed into municipal law through enabling legislation. 
    • While the Indian Constitution allows for formal dualism, the Supreme Court has, in recent cases, moved towards a monist tradition. 
  • The issuance of a notification under Section 90(1) is an executive act, not a legislative one. Therefore, even from the perspective of dualism, the Court's reasoning is questioned. 
  • In this tradition, international law can be incorporated into the domestic legal regime, even if not explicitly incorporated, as long as it is not inconsistent with domestic law. 
  • Cases such as PUCL vs. India, Vishakha vs. State of Rajasthan, and Puttaswamy vs. Union of India have laid down the principle of the "presumption of compatibility" or "presumption of consistency" between domestic and international law. Domestic law should be interpreted to avoid contradicting India's obligations under international law unless there is a clear contravention.

Effect of International Law:

  • International law has significant implications domestically. The courts are expected to give effect to progressive international law to protect the rights of citizens and persons, even if the legislature and executive have not taken steps to transform it into domestic law. 
  • The Supreme Court's decision in the case of DTAAs represents a setback to the progressive judicial journey initiated by previous cases that took international law seriously. 
  • Critics argue that without notification under Section 90(1), the Court should have harmoniously interpreted India's international law obligations in the DTAA with those in the Income Tax Act. 
  • The DTAA provision should have been considered part of Indian law. The judgment highlights that the Supreme Court is supreme because it is the final authority and is not infallible. It is subject to criticism and debate, particularly in complex matters involving international law and domestic legislation. 


The Supreme Court's interpretation in this case could undermine the progress made in taking international law seriously in India's domestic legal regime and underscores the importance of examining judicial decisions critically. The judgment only rationalises the violation of international law but also makes India susceptible to international claims under other instruments of international law, such as bilateral investment treaties.


Prelims PYQ

Q. With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non- resident entities, which of the following statements is/are correct?

1) It is introduced as a part of the Income Tax Act.

2) Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements".

Select the correct answer using the codes given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

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