Supreme Court: DTAA Requires Central Notification Under Section 90 for Enforcement

Companies like Nestle SA, the parent company of Nestle India, may face increased taxes on their dividends following a recent Supreme Court ruling. This ruling states that a Double Taxation Avoidance Agreement (DTAA) cannot be enforced unless it is officially notified under the Income Tax Act.

In simpler terms, companies might have to pay more taxes on their profits when the DTAA is not formally recognized under the law.

The Supreme Court clarified that for any court, authority, or tribunal to apply a DTAA or any changes to its terms and conditions that affect the existing laws, a formal notification under Section 90(1) of the Income Tax Act is mandatory. This ruling came as part of a decision on multiple petitions, one of which involved Nestle SA as the respondent.

This decision from the Supreme Court overrules a previous judgment by the Delhi High Court. The Income Tax Act's Section 90 is designed to prevent individuals or companies from paying income tax twice, especially when conducting business in a foreign country or with a foreign company.

As per the sources, this ruling will have a significant impact on the industry & could potentially bring in millions of dollars in additional tax revenue for the government.

Moreover, this decision might lead to reopening old cases where tax authorities could take new actions, like demanding more taxes or refusing to provide reduced withholding taxes for payments made in the past. This situation might not be received favorably by countries that have tax treaties with India.

Apex Court Concluded: If a Double Taxation Avoidance Agreement (DTAA) or a Protocol between India and one nation specifies a particular treatment for a certain matter, and later, another nation (that's part of a multilateral organization like the OECD) gets more favorable treatment, it does not automatically mean that the first nation's DTAA with India will get the same benefit for that matter.

In such cases, the terms of the initial DTAA need to be changed separately through a notification under Section 90.

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