Deciphering the Supreme Court’s verdict on the Most Favoured Nation (MFN) Clause

31 October 2023

What is the Most Favoured Nation (MFN) clause?

The MFN clause allows for a reduction in the TDS rates on dividends, interest, royalties, or fees for technical services (FTS), as applicable.

Also, it can limit the scope of royalty/FTS (for example, make available) in the treaty entered with the First Country.

These adjustments only come into play if, at a later date, such concessions are extended by India to another OECD member (Third Country).


What was happening?

  1. The bilateral treaties between India and the Netherlands, France, and Switzerland contained the MFN clause.
  2. Entities based in the Netherlands, France, and Switzerland automatically claimed the beneficial provisions present in subsequent tax treaties signed by India with Third Countries, based on the MFN clause in their respective DTAAs with India.
  3. Certain Third Counties were not an OECD member at the time of signing the DTAA with India and became OECD members later.


• DTAA entered between India and Slovenia contained lower tax rate of 5% on Dividend.

• India-Slovenia DTAA came into force on Feb 17, 2005.

• Slovenia became an OECD member on July 21, 2010.

Entities from the First Country with whom India had entered into DTAA before Slovenia (Third Country) claimed beneficial provisions present in the India-Slovenia DTAA under the MFN clause automatically without CBDT notification.

Supreme Court Ruling

Issues raised Held
1.Whether there is any right to invoke the MFN clause when the Third Country with which India has entered into a DTAA was not an OECD member at the time of entering into such DTAA?

2.Whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is Issued.

1.Notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.

2.Third Country should be a member of OECD at the time of entering into DTAA with India, for the earlier treaty beneficiary (First Country) to claim parity.

3.MFN clause present in a tax treaty does not automatically lead to the benefit present in DTAA entered with a Third Country being extended automatically to the First Country. The terms of the earlier DTAA entered with the First Country are required to be amended through a separate notification under Section 90.

Treelife comments : Going forward, entities from First Country should claim beneficial provisions present in DTAA entered between India and the Third Country under the MFN clause if:

1.Third Country is OECD member at the time of entering the DTAA with India
2.CBDT has issued a notification extended the benefits present in DTAA entered with a Third Country to the DTAA entered with the First Country

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