Supreme Court's Decision in the Assessing Officer vs. Nestle Case on International Law and India's Investment Climate : Daily News Analysis

Date : 09/11/2023

Relevance: GS Paper 2- Polity- Taxation System
GS Paper3- Indian Economy - Taxation

Keywords:FDI, Double Taxation Avoidance Agreements (DTAAs), The Most Favoured Nation (MFN),


  • The uncertainty surrounding taxation measures in India has long been a major concern for foreign investors. This uncertainty, which affects not only the actions of the executive branch but also those of the judiciary, creates a challenging environment for foreign businesses operating in the country.
  • The recent verdict by the Supreme Court of India in the Assessing Officer Circle (International Taxation) New Delhi vs. M/s Nestle SA case has significant implications for international law obligations and foreign investments in India.

MFN and DTAA:-

  • The most favored nation (MFN) principle is based on the idea that countries should treat all their trade partners equally—that no one country should be “more favored.” It means no country should give special treatment to goods or services coming from one particular trading partner.
  • A Double Taxation Avoidance Agreement (DTAA) is a pact signed by two nations that encourages capital investment, trade in goods and services, and other economic activities between the two nations by preventing International Double Taxation.

The Most Favoured Nation (MFN) Clause in Tax Treaties:

  • The crux of the matter in the Assessing Officer vs. Nestle case revolves around the interpretation and application of the Most Favoured Nation (MFN) clause in tax treaties, specifically in the context of the Double Taxation Avoidance Agreements (DTAAs) that India has entered into with various countries.
  • The MFN clause is a crucial component of these agreements, as it aims to prevent the double taxation of income earned by individuals or entities operating in multiple countries.
  • India has signed DTAAs with numerous nations, including the Netherlands, France, and Switzerland, all of which are members of the Organization for Economic Co-operation and Development (OECD).
  • These agreements require a 10% withholding tax on dividends paid by Indian entities to residents of these countries. Additionally, these DTAAs contain an MFN provision, stipulating that if India extends preferential tax treatment to any third country that is an OECD member, the same treatment should be provided to the Netherlands, France, and Switzerland under their respective DTAAs.
  • However, the situation becomes more complex when we consider countries like Slovenia, Colombia, and Lithuania. When India initially signed DTAAs with these countries, they were not members of the OECD. Subsequently, these nations became OECD members.
  • The Delhi High Court initially held that under the MFN provision, the preferential tax treatment granted in, for instance, the India-Slovenia DTAA should be extended to the India-Netherlands DTAA.
  • Nevertheless, the Supreme Court's verdict took a different stance, arguing that when the India-Netherlands DTAA was signed, Slovenia was not an OECD member. Consequently, the benefits accorded to Slovenia, which attained OECD membership at a later date, do not apply to the India-Netherlands DTAA.
  • This ruling has the potential to impose a significant tax burden estimated at ₹11,000 crore on foreign investors and may also lead to the reopening of past cases.

Freezing Treaty Provisions in Time:

  • The Supreme Court's decision to freeze the provisions of the treaty in time has raised several concerns. There is no evidence within the text of the India-Netherlands DTAA to suggest that the phrase "is a member of the OECD" is limited to countries that were OECD members on the day the treaty was signed.
  • This interpretation appears to employ domestic interpretative techniques to analyze a term in an international treaty. Such an approach goes against the fundamental principle of non-discrimination standards such as the MFN clause in economic treaties.
  • The MFN clause is designed to ensure that any future benefits extended to a third country by one of the treaty-signing nations become automatically available to all its treaty partners.

The Doctrine of Dualism vs. Monism in International Law:

  • The Supreme Court's decision also touches upon the doctrine of dualism in international law, which asserts that international law is not enforceable domestically until it is transformed into municipal law through enabling legislation.
  • While the Indian Constitution provides for this dualistic approach, the Supreme Court has, in some cases, leaned towards the monist tradition of incorporating international law into the domestic legal system, even without explicit incorporation, as long as it does not conflict with domestic law.
  • This shift toward monism is evident in cases such as PUCL vs. India, Vishakha vs. State of Rajasthan, and Puttaswamy vs. Union of India. These cases establish a "presumption of compatibility" or "presumption of consistency" between domestic and international law.
  • This presumption can only be rebutted if a domestic law explicitly contradicts international law. In other words, domestic law should, whenever possible, be interpreted in a manner that aligns with India's international law obligations.
  • This approach ensures that progressive international law is upheld by the courts, protecting the rights of citizens and individuals even when the legislative and executive branches have not acted to incorporate it into domestic law.
  • The Supreme Court's decision, however, does not reference this line of cases in its reasoning. Consequently, this judgment represents a setback to the progressive judicial journey initiated by cases such as Vishakha, which highlighted the importance of taking international law seriously.

The Implications of the Supreme Court's Decision:

The Supreme Court's interpretation of the MFN clause, as well as its insistence on the necessity of a notification under Section 90(1) of the Income Tax Act to give effect to the MFN provision in the DTAA, has raised several concerns and has far-reaching implications.

1. Executive Power vs. Legislative Authority:

  • The Court's decision essentially empowers the executive branch to circumvent its international law obligations by choosing not to issue the required notifications domestically.
  • This not only rationalizes the violation of international law but also makes India susceptible to international claims under other instruments of international law, such as bilateral investment treaties.
  • The executive's discretion in this matter could lead to inconsistent and unpredictable tax treatment for foreign investors, further deterring potential investment in the country.

2. Impact on India's Investment Climate:

  • Foreign investors seeking stable and predictable taxation environments are likely to be discouraged by the uncertainty created by the Supreme Court's decision.
  • The potential imposition of a substantial tax burden on foreign investors and the reopening of past cases could significantly impact their willingness to invest in India.
  • This, in turn, could hamper India's efforts to attract foreign investment, which is essential for economic growth and development.

3. Weakening the Rule of Law:

  • The decision also has broader implications for the rule of law in India. It appears to undermine the principle of legal predictability, which is crucial for fostering trust in a country's legal system.
  • Foreign investors rely on the consistency and fairness of legal decisions to make informed investment decisions. When legal interpretations become inconsistent or unpredictable, it erodes trust in the legal system and can have a detrimental impact on economic growth.


The Supreme Court's recent judgment in the Assessing Officer vs. Nestle case has raised significant concerns about the interpretation of international law obligations and the potential consequences for India's investment climate. By freezing treaty provisions in time and advocating the necessity of a domestic notification for the MFN provision, the decision has created uncertainty and could deter foreign investment. Moreover, it has shifted India's approach toward international law from a more progressive monist tradition to a potentially problematic dualistic perspective.

Foreign investors, who seek stability, consistency, and predictability in the tax regime of a country, may hesitate to invest in India if they perceive the tax treatment as unpredictable and subject to executive discretion. This could hamper India's ability to attract the foreign investment necessary for economic growth and development. In summary, the Supreme Court's decision in the Assessing Officer vs. Nestle case has far-reaching implications, not only for international law but also for India's investment climate and the rule of law.

Probable Questions for UPSC mains Exam-

  1. Assess the implications of the Supreme Court's decision in the Assessing Officer vs. Nestle case on India's investment climate and its potential impact on foreign investors. Analyze the role of the Most Favoured Nation (MFN) clause in Double Taxation Avoidance Agreements (DTAAs) and its interpretation by the Supreme Court. (10 Marks, 150 Words)
  2. Discuss the significance of the Supreme Court's approach to freezing treaty provisions in time and requiring a domestic notification for the MFN provision in the context of international law obligations. Evaluate the potential challenges posed by this decision on the rule of law in India and its implications for the country's efforts to attract foreign investment. (15 Marks, 250 Words)

Source- The Hindu