Sauce for the Goose, Sauce for the Gander: How India’s MFN Argument Imperils the MLI’s Anti-Abuse Framework 

The Indian tax department faces a critical legal challenge regarding the enforceability of the Multilateral Instrument (MLI), as recent tribunal rulings have leveraged the department’s own successful argument from the Supreme Court’s Nestle MFN case—that treaty amendments require a separate domestic notification under the Income-tax Act to become effective—to now contest the validity of the MLI’s anti-abuse provisions.

Because India implemented the MLI through a single omnibus notification without issuing subsequent, specific notifications for each modified bilateral treaty, tribunals in the Sky High and Kosi Aviation cases have ruled that the MLI’s modifications, such as the Principal Purpose Test, are not enforceable in India, creating significant uncertainty and potentially undermining a key global tool for preventing tax treaty abuse.

This ironic situation leaves the department contesting its own established legal principle and may force it to issue a series of new notifications to resolve the controversy.

Sauce for the Goose, Sauce for the Gander: How India’s MFN Argument Imperils the MLI’s Anti-Abuse Framework 

In the high-stakes world of international tax law, legal precedents are like boomerangs. A winning argument today can circle back with unexpected force tomorrow, striking the very hand that threw it. This is the precise predicament now facing the Indian tax department as a powerful legal principle it successfully championed—the strict requirement for treaty notification—is being used to challenge the enforceability of one of its most potent modern weapons: the Multilateral Instrument (MLI). 

A legal storm is brewing, centered on a deceptively simple question: How must a complex, multi-jurisdictional treaty like the MLI be incorporated into Indian domestic law? The answer, emerging from recent tribunal rulings, threatens to create a significant compliance and enforcement gap, leaving billions in tax revenue in limbo and undermining a key pillar of the global fight against base erosion and profit shifting (BEPS). 

The Grand Ambition of the Multilateral Instrument (MLI) 

To understand the gravity of the current challenge, one must first appreciate the MLI’s purpose. Conceived under the OECD/G20 BEPS Project, the MLI was a revolutionary solution to a practical nightmare. With over 3,000 bilateral tax treaties worldwide, renegotiating each one individually to implement BEPS anti-treaty-shopping measures would have taken decades. 

The MLI offered a clever workaround. It acts as a sweeping overlay, allowing jurisdictions to swiftly modify their existing treaty networks en masse. Countries sign the MLI and then list their existing treaties (“Covered Tax Agreements”) and the specific BEPS provisions they wish to adopt. When two treaty partners mutually agree on an amendment, the MLI automatically modifies their bilateral treaty accordingly. 

India was an enthusiastic adopter. It signed the MLI in 2017, deposited its instrument with the OECD in June 2019, and subsequently issued a consolidated notification on August 9, 2019, under Section 90 of the Income-tax Act, 1961. This notification contained the full text of the MLI and India’s list of covered treaties and chosen options. Crucially, however, it did not issue subsequent, specific notifications for each bilateral treaty as they were matched and modified by partner countries. 

This single, omnibus notification is the epicenter of the current legal earthquake. 

The Precedent: The Supreme Court’s Landmark Nestle Ruling on MFN 

The seeds of the tax department’s current woes were sown two years ago in the Supreme Court case of Assessing Officer v Nestle SA. The dispute centered on Most Favoured Nation (MFN) clauses found in some of India’s older tax treaties with OECD members. 

An MFN clause essentially states: “If India later agrees on a more beneficial tax rate or scope with another OECD country, that same benefit will automatically apply to you.” Taxpayers argued this was a self-executing provision. The tax department, however, contended that for such a benefit to become enforceable in India, it must be formally incorporated into domestic law via a separate notification under Section 90 of the IT Act. 

The Supreme Court sided decisively with the tax department. It established a strict procedural mandate: A treaty amendment, regardless of its origin, does not become part of Indian municipal law until it is expressly notified by the Central Government under Section 90. The court reasoned that such a process was essential for certainty, clarity, and the sovereign exercise of power. 

At the time, this was a major victory for the tax department, allowing it to control the timing and application of costly MFN benefits. Little did it know that it had just handed taxpayers a perfectly crafted legal weapon. 

The Boomerang Effect: Sky High and Kosi Aviation Apply Nestle to the MLI 

The Nestle precedent has now returned with a vengeance, directly challenging the foundation of the MLI’s implementation in India. 

In the recent case of Sky High Appeal XLIII Leasing Company v ACIT, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) faced a classic BEPS scenario. Irish aircraft leasing companies were claiming exemption on rental income under the India-Ireland tax treaty. The tax authorities sought to deny these benefits by invoking the MLI’s Principal Purpose Test (PPT), a general anti-abuse rule designed to counter treaty shopping. 

The taxpayers’ defense was simple and powerful: They pointed to the Nestle ruling and argued that the MLI’s modifications to the India-Ireland treaty had never been separately notified under Section 90. The August 2019 omnibus notification, they contended, was insufficient. 

The ITAT agreed. The tribunal held that the logic of Nestle applies with even greater force to the MLI. It emphasized the MLI’s inherent complexity, where matching is required, and countries can apply provisions with reservations and modifications. The tribunal astutely noted: 

“Without a domestic notification that identifies the exact contours of modification of a DTAA, there is a risk that the Indian court or authority may apply the MLI provisions incorrectly.” 

It also dismissed the reliance on “synthesised texts” (combined documents showing the treaty as modified by the MLI) as informal, non-binding aids, not substitutes for lawful notification. 

Shortly after, the Delhi ITAT in Kosi Aviation Leasing v ACIT echoed this sentiment. It rejected the tax department’s argument that other multilateral agreements had been implemented without separate notifications, distinguishing them as either administrative pacts or agreements without matching provisions. The core substantive modifications wrought by the MLI, the tribunal insisted, demand stricter procedural compliance. 

The Stakes: Why This Legal Quagmire Matters 

The implications of these rulings are profound and extend far beyond a few aircraft leasing cases. 

• Massive Legal Uncertainty: If the tribunals’ view is upheld, the MLI’s application to all of India’s covered treaties becomes questionable for the period prior to any curative notification. This creates a window where the PPT and other MLI rules may be unenforceable, potentially reopening past assessments and impacting ongoing litigation. 

• A Two-Edged Sword for Taxpayers: While multinationals may use this to shield themselves from PPT challenges, it also creates uncertainty for those seeking clarity and protection under the MLI’s new provisions, such as improved dispute resolution mechanisms. 

• India’s BEPS Compliance at Risk: The MLI is a cornerstone of India’s commitment to the global BEPS project. A domestic legal flaw in its implementation undermines India’s position as a leader in the fight against aggressive tax avoidance and could attract scrutiny from its treaty partners. 

• The “Sauce for the Gander” Irony: The core irony is inescapable. The tax department’s successful insistence on procedural formality in Nestle to protect the fiscal treasury is now being used to block the enforcement of a tool designed for the exact same purpose. The principle of consistency in law demands that what applies to a beneficial MFN clause must also apply to a restrictive PPT. 

The Road Ahead: Litigation and Legislative Fixes 

The controversy is far from settled. The tax department is certain to appeal these tribunal decisions to higher courts. The upcoming legal battles will likely focus on distinguishing the MFN clause from the MLI. The department may argue that the August 2019 notification was a valid exercise of power that encompassed all future matched provisions, making separate notifications redundant. 

However, given the Supreme Court’s strong stance in Nestle on the necessity of clarity and express notification, the department faces an uphill task. 

A more pragmatic, albeit tacitly admitting defeat, approach would be for the government to issue a wave of specific notifications for each modified treaty, prospectively curing the defect. This would secure the MLI’s future application while the legal battle over its past enforceability continues in the courts. 

In conclusion, the clash between the MFN precedent and the MLI is more than a technical legal dispute; it is a stark reminder that in tax law, procedure and substance are inextricably linked. India’s attempt to swiftly modernize its treaty network via the MLI has collided with its own domestic legal principles. How this conflict is resolved will not only determine the fate of countless tax disputes but will also define India’s ability to seamlessly integrate future international tax reforms into its legal fabric. For now, the tax department’s own boomerang is in mid-flight, and its landing will be consequential.