An investor that banks a benefit the authorities have not granted is exposed, however well the clause appears to read. The Nestlé ruling is the clearest modern illustration. Companies had used the most-favoured-nation clause in India's older tax treaties to claim lower rates of withholding, reasoning that the clause extended those rates automatically. In October 2023 the Supreme Court held it did not. The benefit, it found, required an official notification India had never issued.
What the clause promised
Several of India's tax treaties, including those with the Netherlands and France, carried a most-favoured-nation clause. In substance it promised that if India later gave a third state, a member of the OECD, more generous treatment on dividends, royalties or fees, that better treatment would extend to the treaty partner as well. Companies read the clause as self-executing. When India signed later treaties carrying lower rates, they applied the lower rate to their own payments and claimed back the difference. An earlier line of Delhi High Court cases had agreed that a protocol carrying such a clause took effect as part of the treaty, without anything further required.
What the Supreme Court decided
On 19 October 2023 the Supreme Court reversed that line. It held that a most-favoured-nation clause does not operate of its own force in Indian law. To give effect to a treaty or a protocol that changes the rate a taxpayer pays, a notification under section 90 of the Income-tax Act is necessary, and India had issued none for the lower rates claimed. The court added that the third state must have been an OECD member when it entered its own treaty with India, not merely later. On both grounds the imported rate failed, and the treaty's stated rate applied.
Where the exposure sat
The exposure was reliance on a benefit the revenue had not accepted and the law had not enacted. The clause was real and its commercial logic was sound, but its effect in Indian law turned on an official act that had not happened. A taxpayer applying the lower rate carried the difference as a contingent liability, payable if the self-executing reading failed. When it failed, the difference fell due, and the intervening years of positions were reopened with it.
Could it have been avoided?
Yes, at the cost of some upside. A conservative position applied the treaty's stated rate and treated the most-favoured-nation benefit as a claim to be pursued once confirmed, not a rate to be taken in advance. That approach forgoes the immediate saving and carries no reopening risk. The aggressive position was not unreasonable on the wording of the clause. It was simply contingent, and the contingency went unpriced.
The lessons
- Do not bank a benefit that depends on an act that has not occurred. A treaty rate that requires a notification is available when the notification issues, not before. Treat the un-notified benefit as an upside to be claimed, not a position to be taken.
- Read most-favoured-nation as fragile. Its effect depends on procedure, timing and the precise words of the clause. Price the gap between the treaty rate and the imported rate as a contingent exposure, and provision for it.
- Reliance risk compounds over time. A rate position repeated across several years multiplies the reopening if it fails. The longer an un-notified benefit is taken, the larger the exposure it quietly builds.
- The room to import better terms is narrowing. India's investment-treaty model now omits the most-favoured-nation clause, and its tax-treaty practice now requires a notification before one applies. Across both instruments, a structure that depends on borrowing terms from a third treaty is building on ground that is closing.
The arc
The ruling reads as a procedural tightening, not the withdrawal of a right. It clarified that a treaty benefit which changes domestic tax must be enacted into domestic law before it applies, a requirement familiar in any dualist legal system: in the United Kingdom, too, a treaty has no force in domestic law until legislation gives it effect. The clause also runs both ways between states. In late 2024 Switzerland, reading the same decision, suspended most-favoured-nation treatment for India under their treaty, a reminder that the mechanism is a reciprocal arrangement between governments rather than a private entitlement. India's position is consistent on both sides of that exchange: a treaty benefit takes effect when the states give it effect, and not before.
Frequently asked questions
Can we still rely on a most-favoured-nation clause to claim a lower Indian withholding rate?
Only once the benefit is notified. After Nestlé, an imported rate applies in Indian law when a notification under section 90 gives it effect, and where the third state was an OECD member at the time of its treaty with India. Absent the notification, the treaty's own rate governs. Claim the benefit if and when it is notified; do not apply it in advance.
Does the ruling reach past years already filed?
It can. The decision states the law as the court found it to be, so positions taken on the self-executing reading are open to reassessment for years still within time. A taxpayer that applied an un-notified rate should review its open positions and provision for the difference.
Is requiring a notification unusual?
No. In dualist systems a treaty change that affects domestic law generally needs domestic enactment to take effect. India's notification requirement is an instance of that ordinary principle, not a special obstacle placed in the investor's way.
How does this connect to investment treaties?
It is the same theme in a different instrument. India's investment-treaty model now leaves out the most-favoured-nation clause, just as its tax-treaty practice now requires a notification to use one. The scope to import better terms from a third treaty is narrowing across both, which is set out in the companion piece on how India reset its treaty protection.
Sources and authorities
- Assessing Officer (International Taxation) v Nestlé SA and connected appeals — Supreme Court of India, 2023 INSC 928, 19 October 2023: notification under section 90 mandatory to give effect to an MFN clause; OECD membership assessed at the date of the relevant treaty.
- Earlier Delhi High Court line (Steria; Concentrix), reversed by the above.
- India–Netherlands and India–France DTAAs (MFN protocols); section 90, Income-tax Act 1961.
- Switzerland's suspension of MFN treatment for India (announced December 2024, effective 2025) — comparative and aftermath.
- Companion analyses: the case-study hub; the piece on how India reset its treaty protection (investment-treaty MFN removal); the synthesis hub.
This article is general information and not legal or tax advice. Laws and case-law develop; obtain advice on your specific circumstances before acting.