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In the matter of interpretation of treaties the Supreme Court in their decision in [2021] 432 ITR 471 (SC) held that the DTAAs that have been entered into by India with other contracting States have to be interpreted liberally with a view to implement the true intention of the parties. In their previous ruling in Azadi Bachao Andolan it quoted from the principle of liberal interpretation of tax treaties by the Federal Court in John N. Gladden v. Her Majesty the Queen 85 D.T.C 5188 at 5190 as :

“Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned.”. . .

Contrary to this liberal interpretation approach the Supreme Court in a more hyper technical sense in Nestle case judgment dated 19 October 2023 has held that Most Favoured Nation clause (MFN) under any protocol to a DTAA is no guarantee to a concessional rate or more restrictive definition of certain terms like the expression ‘fees for technical services’ until the time the relevant treaty article itself is modified under a separate notification of the Central Government amending the subject article. Further to claim parity or same treatment or to invoke the protocol/MFN clause with regard to third country with which India has entered into a Double Tax Avoidance Agreement it is also held desirable that the same is an OECD member at the time when the subject DTAA/protocol was executed meaning at the date of signing the protocol.

This decision from the highest Court will be a challenge for the non –residents who wish to seek benefit of the MFN clause under a treaty protocol.

Tax auditors may have to also report any such cases as short deduction of tax cases in their report in the light of this ruling.


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