MFN argument comes back to bite Indian tax department on the MLI

The Multilateral Instrument (MLI) represents a significant global effort to combat tax treaty abuse by modifying existing bilateral tax treaties en masse. However, its enforcement in India has recently sparked an interesting legal debate regarding certain procedural requirements under domestic law. This article traces the background, purpose, and challenges faced in enforcement of the MLI in India.

The MLI is a global instrument designed to modify bilateral tax treaties to implement changes recommended by the OECD’s BEPS initiative. The MLI eliminates the need for countries to individually renegotiate and amend each bilateral treaty, which could be very time consuming.

To implement the MLI, each country/jurisdiction was required to deposit a signed instrument with the OECD specifying the treaties (Covered Treaties) to which it intends to apply the MLI, along with a list of specific amendments or reservations for each tax treaty. Where the counterparty to a bilateral treaty also identifies the same bilateral treaty and agrees to the same amendments, the matched amendments apply to that bilateral tax treaty.

India deposited its instrument with the OECD on June 25 2019. Pursuant to this, in terms of Section 90(1) of the Income-tax Act, 1961 (the IT Act), India issued a single consolidated notification dated August 9 2019 that included the text of the MLI as well as the list of Covered Treaties and amendments proposed by India in each of those treaties. Though this notification spelt out India’s position, there was no further notification of the matched amendments in each bilateral tax treaty based on the instruments submitted by other countries/jurisdictions.

Against the above background, a question arose regarding the enforceability of the MLI purportedly amending the covered bilateral treaties entered into by India in the absence of a notification regarding the specific amendments in such treaties.

Two years ago, in Assessing Officer (International taxation) v Nestle SA, the Indian Supreme Court rendered a landmark ruling on the enforceability of the most favoured nation (MFN) clause in the tax treaties entered into by India with OECD member countries. The question was whether a narrower scope or lower rate of taxation agreed to by India with a third country (an OECD member) will automatically apply to an earlier treaty with another OECD member by virtue of an MFN treatment agreed to by India.

The court essentially accepted the argument of the tax department and held that any amendment in tax treaties (including MFN treatment) does not become enforceable under the municipal legal system unless and until it is expressly brought into force through a separate notification issued under Section 90 of the IT Act. Consequently, the court held that for the MFN benefit to apply to a particular tax treaty, there should be a notification issued under Section 90 of the IT Act expressly importing and making applicable the beneficial treatment accorded to a particular third state.

In Sky High Appeal XLIII Leasing Company v Assistant Commissioner of Income-tax (International Tax) (Mumbai Income Tax Appellate Tribunal, August 13 2025), the taxpayers were Irish companies engaged in the business of aircraft leasing. The taxpayers claimed that the rental income earned by them was not taxable in India on account of beneficial provisions of the India–Ireland tax treaty. However, the tax authorities sought to invoke the MLI’s principal purpose test provisions to deny treaty benefits.

By relying upon the decision in Nestle SA, the Income Tax Appellate Tribunal held that even if both the India–Ireland tax treaty and the MLI have been notified, the changes sought to be brought about by the MLI would not be enforceable unless the impact of the MLI on the India–Ireland tax treaty is separately/expressly notified under Section 90 of the IT Act.

The tribunal emphasised that such notification is even more critical in the context of the MLI, where multiple jurisdictions opt into certain provisions, reserve on others, and often apply them with modifications or deferrals. Without a domestic notification that identifies the exact contours of modification of a double tax avoidance agreement, there is a risk that the Indian court or authority may apply the MLI provisions incorrectly.

It was further held that the MLI cannot be enforced through synthesised text, as the same is merely an informal document intended to facilitate understanding and is not in itself legally binding.

Subsequently, in Kosi Aviation Leasing v Assistant Commissioner of Income-tax (September 30 2025), the Delhi bench of the Income Tax Appellate Tribunal echoed the Sky High rationale while dealing with the issue of MLI enforceability. The tribunal disapproved the practice of enforcing the MLI through a single omnibus notification on the ground that the same is insufficient for application of the MLI in India and that the OECD itself recognises that the implementation of the MLI will depend on, and is subject to, the domestic law of each country.

The tribunal also rejected the tax authorities’ argument regarding the past application of other MLIs (the SAARC Limited Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in Tax Matters, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports) in India without any separate notification on the ground that:

• There was no requirement of matching provisions as all the terms and conditions of these agreements were agreed to be applied by each signatory on the same date; or

• They were merely administrative pacts to cooperate and share information without modifying the substantive rights and obligations under the existing tax treaty.

It appears to be an ironic case of the arguments successfully advanced by the tax department in the context of MFN treatment (Nestle SA) coming back to haunt it in the context of the MLI provisions. There is no doubt that what is sauce for the goose is sauce for the gander. However, it will be interesting to see how the higher courts compare and contrast the two provisions – namely, the MFN and MLI – as the two operate in different fields. The sufficiency of the omnibus notification dated August 9 2019 issued by the Indian tax authorities regarding the MLI provisions is also likely to be hotly contested before the courts soon.

Be that as it may, the tax department may also consider separately issuing notifications now to put an end to this controversy, while continuing to legally contest for the past.