Volume 10 No 6    /    Read Article

By Sakate Khaitan, Abbas Jaorawala, and Weindrila Sen (Guest Authors)

India’s tax treaties with various countries mitigate double taxation and reduce the scope of taxable income or provide lower rates of withholding tax in certain cases. Some agreements include a most favoured nation (“M.F.N.”) clause. The clause allows the treaty partner country to import benefits from a subsequently signed Indian income tax treaty when certain conditions are met, most notably that the treaty partner country in the treaty subsequently signed is a member of the O.E.C.D. Opinions differed as to whether the M.F.N. clause is self-executing when a treaty partner country was not a member of the O.E.C.D. at the time its treaty with India is negotiated but subsequently becomes a member. Does the M.F.N. clause apply automatically or are there procedures to follow? Recently, the Supreme Court of India upheld the position of Indian tax authorities that an M.F.N. clause is not self-executing and that an M.F.N. clause properly looks only to the list of O.E.C.D. member states at the time the earlier treaty was signed. Sakate Khaitan, the Senior Partner of Khaitan Legal Associates, Mumbai, Abbas Jaorawala, a Senior Director and Head-Direct Tax of Khaitan Legal Associates, Mumbai, and Weindrila Sen, an associate of Khaitan Legal Associates, Mumbai explain all. Indian subsidiaries now face the risk of taxation, interest, and penalties for the past 10 years.  See more →