We are pleased to release a Tax Alert which summarizes a recent ruling of the Authority for Advance Rulings (AAR) in the case of Steria (India) Ltd. (Applicant) wherein the issue was whether various management services rendered by a French company could be regarded as taxable in India under the India-France Double Taxation Avoidance Agreement (France DTAA) by taking into account the “Most Favoured Nation” (MFN) clause as available in the Protocol to the France DTAA. The AAR ruled that the restriction in the MFN clause of the France
DTAA is in relation to rates of taxes and the “make available” condition, as available in the India-UK DTAA, is not included within its purview. Furthermore, the notification (France Notification) issued by the Government of India (GOI) pursuant to the Protocol giving effect to the MFN clause provided only for a lower rate of tax and did not cover restrictive scope to limit taxation of services which satisfy the “make available” condition. Had the intention been so, the same would have been provided in the France Notification, as was the case in the context of the India-Netherlands DTAA. Accordingly, at the most, India is under an obligation to limit the rate or scope by a notification but such type of action would not be within the purview of the AAR.
This ruling suggests a restricted application of the MFN clause to “rates of tax” only to the France DTAA. This is contrary to rulings of the Income Tax Appellate Tribunals (Tribunal) in the cases of DCIT v ITC Ltd. and National Organic Chemical Industries Ltd. v DCIT . In these cases, the Tribunal had held that the Protocol also limits the scope of FTS taxation and, accordingly, restricts source taxation only if the “make available” clause is satisfied with regard to the applicability of the MFN clause under the France DTAA. It may be noted that the France Notification sought to unilaterally amend the France DTAA and restrict the applicability of the MFN clause to only a lower tax rate. However, for applicability of the MFN clause (which provides for restricted rate as well as scope) in case of the France DTAA, no independent action is required, in contrast to the India-Switzerland DTAA which requires a specific action on the part of the Government to implement the MFN clause.
The AAR also seems to have suggested the ”self-contained” approach for each treaty interpretation while, for terms like “make available”, Indian jurisprudence has adopted a parallel treaty interpretation and has applied the explanation present in the India-US DTAA to interpret the scope of similarly worded DTAAs.
DTAA is in relation to rates of taxes and the “make available” condition, as available in the India-UK DTAA, is not included within its purview. Furthermore, the notification (France Notification) issued by the Government of India (GOI) pursuant to the Protocol giving effect to the MFN clause provided only for a lower rate of tax and did not cover restrictive scope to limit taxation of services which satisfy the “make available” condition. Had the intention been so, the same would have been provided in the France Notification, as was the case in the context of the India-Netherlands DTAA. Accordingly, at the most, India is under an obligation to limit the rate or scope by a notification but such type of action would not be within the purview of the AAR.
This ruling suggests a restricted application of the MFN clause to “rates of tax” only to the France DTAA. This is contrary to rulings of the Income Tax Appellate Tribunals (Tribunal) in the cases of DCIT v ITC Ltd. and National Organic Chemical Industries Ltd. v DCIT . In these cases, the Tribunal had held that the Protocol also limits the scope of FTS taxation and, accordingly, restricts source taxation only if the “make available” clause is satisfied with regard to the applicability of the MFN clause under the France DTAA. It may be noted that the France Notification sought to unilaterally amend the France DTAA and restrict the applicability of the MFN clause to only a lower tax rate. However, for applicability of the MFN clause (which provides for restricted rate as well as scope) in case of the France DTAA, no independent action is required, in contrast to the India-Switzerland DTAA which requires a specific action on the part of the Government to implement the MFN clause.
The AAR also seems to have suggested the ”self-contained” approach for each treaty interpretation while, for terms like “make available”, Indian jurisprudence has adopted a parallel treaty interpretation and has applied the explanation present in the India-US DTAA to interpret the scope of similarly worded DTAAs.
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