- Protocols under a treaty form a part of it and do not need to be notified separately unless the treaty/protocol itself suggests otherwise.
- The Most Favoured Nation (MFN) clause in the India- France DTAA ensures that a lower rate or a restrictive scope in another convention with an OECD member and India can be imported into the India- France DTAA.
- Payments made for management services by the Indian company to the French company does not constitute FTS under the Indo France DTAA by virtue of the MFN clause.
Recently the Delhi High Court (“Court”) in the case of Steria India Ltd. v. Commissioner of Income Tax and Anr1 relying on the most favored nation clause under the India - France Double Taxation Avoidance Agreement (“India – France DTAA”) held that payments made by an Indian company to a French company for management services does not constitute Fees for Technical Services (“FTS”).
Prior to filing the writ petition before the Court, the Taxpayer had approached the Authority for Advance Ruling (“AAR”) seeking a ruling on whether the payment made by the Taxpayer for the Management Services provided by Steria France will be taxable in India in the hands of Steria France as per the provisions of the India – France DTAA. The argument of the Taxpayer was that Clause 7 of the Protocol did not require any separate notification and could straightway be operationalised was not accepted by the AAR.
Clause 7 of the protocol to the India - France DTAA states that if a lower rate of tax or a restricted scope is provided for in any other treaty that India enters into with any other OECD Member country, then that lower rate or restricted scope will be applicable for the purposes of the India - France DTAA (“Most Favored Nation Clause / MFN Clause”). The Taxpayer argued that the provisions of the India – UK DTAA pertaining to Fees for Technical Services (“FTS”) were more restrictive than as provided in the India - France DTAA. The India – UK DTAA expressly excludes fees for managerial services from the ambit of FTS. Further, it also provides that for a service to qualify as FTS, the service provider must ‘make available’ technical knowledge, experience, skill, know-how or processes to the persons to whom the service is rendered. Accordingly, as per the provisions of the Protocol the restrictive provisions of India – UK DTAA should be imported into the India- France DTAA.
The AAR rejecting the argument of the Taxpayer held that the Protocol in the India - France DTAA could not be treated as forming part of the DTAA. The AAR further held that the restrictions imposed by the Protocol were only to limit the taxation at source for the specific items mentioned therein. The restriction was only on the rates. Further, it held that the ‘make available’ clause found in the India - UK DTAA could not be read into the expression ‘fee for technical services’ occurring in the India-French DTAA unless a notification was issued by the Indian tax authorities to incorporate the less restrictive provisions of the Indo-UK DTAA into the India-France DTAA. Hence concluding that the payment made for managerial services did constitute FTS.
The Court ruling in favour of the Taxpayer and deciding against the decision of the AAR held that the Protocol becomes automatically applicable and there is no need for a separate notification incorporating the beneficial provisions of the India – UK DTAA into the India – France DTAA. The Court also dismissed the contention of the Revenue that when reference is made to one convention signed between India and another OECD member state for the purposes of ascertaining if it had a more restrictive scope or a lower rate of tax, then only that convention has to be used for both the purposes i.e. the taxpayer shall not be allowed to rely upon one convention for a lower rate of tax and subsequently refer to another convention to take advantage of a more restricted scope.
The Court held that the words in the MFN Clause “a rate lower or a scope more restricted” envisages that benefit could accrue on both fronts i.e. a lower rate or more restricted scope – one does not exclude the other. Further, the other expression “if under any Convention, Agreement or Protocol signed after 1-9-1989 between India and a third State which is a member of the OECD” also indicates that the benefit could accrue in terms of lower rate or a more restrictive scope under more than one DTAA which may be signed after 1st September 1989 between India and a State which is an OECD member. The purpose of the MFN Clause is to afford to a party to the India-France DTAA the most beneficial of the provisions that may be available in another DTAA between India and another OECD country. The Court further held that the language in the Protocol makes it self-operational and since the Protocol came into effect on the same day as the DTAA and provides that it is an integral part of the DTAA, the fact that the DTAA has been notified, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the India-France DTAA.
The Court also upheld the judgment of the Kolkata Tribunal in the case of DCIT v. ITC Ltd.2 wherein also it was held that benefit of a lower rate or restricted scope of FTS under the India - French DTAA by virtue of the MFN clause was not dependent on any further action by the respective governments.
Based on the above, the Court held that the FTS provision of the India- UK DTAA should be read into the India- France DTAA and hence Managerial Services provided by Steria France did not constitute ‘fees for technical services’. Accordingly, there was no obligation on SIL to withhold such tax under the ITA.
While the Protocol under the India – France DTAA is self-operational and does not require notification, the protocol in the India - Switzerland DTAA is given effect to by way of an amendment notification wherein it specifically provides that governments of each of the states shall notify each other that the legal requirements for giving effect to the Amending Protocol have been satisfied and it shall enter into force on the date of later of the notifications. Another Protocol which was just entered into by India is the one with Mauritius. This Protocol provides that the states shall notify each other of the completion of the procedures required under their respective laws for the protocol to come into force. Considering the Court in this case has gone into the language of the Protocol, it can be safe to assume that language of each Protocol should be the determining factor as to whether it is self-operation or requires a specific notification.
Background
Steria (India) Limited (“SIL / Taxpayer”), a public limited company registered and resident in India primarily providing IT driven services had entered into a Management Services Agreement (“MSA”) with one of Steria’s group entities, a limited liability partnership, in France (“Steria France”). Under the MSA, Steria France was to provide a myriad of management services including corporate communication, group marketing information systems, human relation services (“Management Services”) to SIL with a view to rationalize and standardize the business conducted by SIL. The Services were provided by Steria France through telephone, fax, e-mail only and there was no presence of any personnel of Steria France in India and hence no risk of Permanent Establishment (fixed or agency) of Steria France in India existed.Prior to filing the writ petition before the Court, the Taxpayer had approached the Authority for Advance Ruling (“AAR”) seeking a ruling on whether the payment made by the Taxpayer for the Management Services provided by Steria France will be taxable in India in the hands of Steria France as per the provisions of the India – France DTAA. The argument of the Taxpayer was that Clause 7 of the Protocol did not require any separate notification and could straightway be operationalised was not accepted by the AAR.
Clause 7 of the protocol to the India - France DTAA states that if a lower rate of tax or a restricted scope is provided for in any other treaty that India enters into with any other OECD Member country, then that lower rate or restricted scope will be applicable for the purposes of the India - France DTAA (“Most Favored Nation Clause / MFN Clause”). The Taxpayer argued that the provisions of the India – UK DTAA pertaining to Fees for Technical Services (“FTS”) were more restrictive than as provided in the India - France DTAA. The India – UK DTAA expressly excludes fees for managerial services from the ambit of FTS. Further, it also provides that for a service to qualify as FTS, the service provider must ‘make available’ technical knowledge, experience, skill, know-how or processes to the persons to whom the service is rendered. Accordingly, as per the provisions of the Protocol the restrictive provisions of India – UK DTAA should be imported into the India- France DTAA.
The AAR rejecting the argument of the Taxpayer held that the Protocol in the India - France DTAA could not be treated as forming part of the DTAA. The AAR further held that the restrictions imposed by the Protocol were only to limit the taxation at source for the specific items mentioned therein. The restriction was only on the rates. Further, it held that the ‘make available’ clause found in the India - UK DTAA could not be read into the expression ‘fee for technical services’ occurring in the India-French DTAA unless a notification was issued by the Indian tax authorities to incorporate the less restrictive provisions of the Indo-UK DTAA into the India-France DTAA. Hence concluding that the payment made for managerial services did constitute FTS.
The Court ruling in favour of the Taxpayer and deciding against the decision of the AAR held that the Protocol becomes automatically applicable and there is no need for a separate notification incorporating the beneficial provisions of the India – UK DTAA into the India – France DTAA. The Court also dismissed the contention of the Revenue that when reference is made to one convention signed between India and another OECD member state for the purposes of ascertaining if it had a more restrictive scope or a lower rate of tax, then only that convention has to be used for both the purposes i.e. the taxpayer shall not be allowed to rely upon one convention for a lower rate of tax and subsequently refer to another convention to take advantage of a more restricted scope.
The Court held that the words in the MFN Clause “a rate lower or a scope more restricted” envisages that benefit could accrue on both fronts i.e. a lower rate or more restricted scope – one does not exclude the other. Further, the other expression “if under any Convention, Agreement or Protocol signed after 1-9-1989 between India and a third State which is a member of the OECD” also indicates that the benefit could accrue in terms of lower rate or a more restrictive scope under more than one DTAA which may be signed after 1st September 1989 between India and a State which is an OECD member. The purpose of the MFN Clause is to afford to a party to the India-France DTAA the most beneficial of the provisions that may be available in another DTAA between India and another OECD country. The Court further held that the language in the Protocol makes it self-operational and since the Protocol came into effect on the same day as the DTAA and provides that it is an integral part of the DTAA, the fact that the DTAA has been notified, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the India-France DTAA.
The Court also upheld the judgment of the Kolkata Tribunal in the case of DCIT v. ITC Ltd.2 wherein also it was held that benefit of a lower rate or restricted scope of FTS under the India - French DTAA by virtue of the MFN clause was not dependent on any further action by the respective governments.
Based on the above, the Court held that the FTS provision of the India- UK DTAA should be read into the India- France DTAA and hence Managerial Services provided by Steria France did not constitute ‘fees for technical services’. Accordingly, there was no obligation on SIL to withhold such tax under the ITA.
Analysis:
This judgment is a welcome move by the Court as it emphasizes on the fact that a Protocol forms an integral part of the DTAA and brings about clarity that no separate notification is required for a protocol to come into effect, unless provided within the Protocol itself. Interestingly, another ruling of the Kolkata Tribunal -DDIT v. IATA BSP India3 - dealt with a similar issue. In that case, the Tribunal introduced the provisions of the India – US / Portugal DTAA into the India – France DTAA by virtue of the MFN Clause and ruled that services provided do not constitute FTS due to the restricted scope of FTS under the US and Portugal Tax Treaties. Accordingly, ruling by a higher judicial authority should bring rest to this issue.While the Protocol under the India – France DTAA is self-operational and does not require notification, the protocol in the India - Switzerland DTAA is given effect to by way of an amendment notification wherein it specifically provides that governments of each of the states shall notify each other that the legal requirements for giving effect to the Amending Protocol have been satisfied and it shall enter into force on the date of later of the notifications. Another Protocol which was just entered into by India is the one with Mauritius. This Protocol provides that the states shall notify each other of the completion of the procedures required under their respective laws for the protocol to come into force. Considering the Court in this case has gone into the language of the Protocol, it can be safe to assume that language of each Protocol should be the determining factor as to whether it is self-operation or requires a specific notification.
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