ITAT Delhi Rules MFN Clause Not Self-Executing, Denies Nil Tax on Interest for Travelport

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has firmly rejected a bid by Netherlands-based Travelport Global Distribution System BV to tax its ₹1.66 crore interest income at a nil rate under the Most Favoured Nation (MFN) clause of the India-Netherlands Double Taxation Avoidance Agreement (DTAA). In a ruling that reinforces the primacy of domestic notification procedures, the tribunal held that the MFN clause is not self-executing and cannot import beneficial treaty rates without a specific notification under Section 90 of the Income Tax Act.

A Refund Interest Dispute

The case arose from a refund of ₹8.04 crore determined for Travelport for Assessment Year 2015-16, which included ₹1.66 crore as interest under Section 244A of the Act. When the refund was credited in November 2019, tax was deducted at source at 42.024% on the interest component. Travelport initially offered the interest to tax at 10% under the India-Netherlands DTAA but later claimed it was exempt—taxable at nil—by invoking the MFN clause in Protocol IV of the treaty.

The company argued that the MFN clause, which obligates India to extend to the Netherlands any lower tax rate or more restricted scope granted to another OECD member, should import the exemption under Article 11(3)(c) of the India-USA DTAA. That provision exempts interest on government-approved debt claims, and Travelport contended that statutory refund interest under Section 244A qualifies as such a claim.

Revenue's Stance: Notification is Key

The Revenue countered that Notification No. S.O. 693(E) dated 30 August 1999 had a limited scope—it only amended Article 11(2) of the India-Netherlands DTAA to reduce the interest tax rate from 15% to 10% for beneficial owners. It did not import any nil-rate exemption. Relying on the Supreme Court's landmark ruling in Assessing Officer v. M/s Nestle SA (2023), the Revenue argued that an MFN clause cannot be enforced domestically without a formal notification under Section 90. Since no such notification existed for the nil rate, the claim failed.

ITAT's Ruling: No Automatic Benefits

The ITAT, comprising Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra, sided with the Revenue. The tribunal observed that the 1999 notification was a deliberate, negotiated compromise between India and the Netherlands to cap the rate at 10%. The preamble acknowledged concessions granted to other OECD members, but the contracting states consciously limited their agreement to that rate.

Crucially, the tribunal held that the requirement of a Section 90 notification, as established in Nestle SA , is an absolute prerequisite. The absence of any notification extending the nil exemption from the India-USA or India-Italy DTAA to the India-Netherlands DTAA was fatal to Travelport's claim. The tribunal also noted that the Indian government had explicitly objected to the Netherlands' unilateral attempt to use the MFN clause to lower rates, reinforcing the need for bilateral notification.

In its key observation, the tribunal stated: "In the absence of such an express notification, we are not inclined to unilaterally import or apply a 'Nil' tax rate." It further added that the assessee "cannot cherry-pick the 'Nil' rate from the US or Italian agreements."

What This Means

The ITAT upheld the Assessing Officer's decision to tax the interest income at 10% under Article 11(2) of the India-Netherlands DTAA. It directed the AO to grant the eligible TDS credit of ₹69.78 lakh but dismissed all other grounds, including the additional claim for set-off of carried-forward losses, which was not pressed.

The ruling serves as a clear reminder that MFN clauses in India's tax treaties are not automatic; they require explicit government notification to take effect. Taxpayers seeking to benefit from lower rates or exemptions in third-country treaties must wait for the formal machinery of Section 90 to be activated.