1. The AAR decision in the case of Steria (India) Ltd, reported in [2014] 364 ITR 381 (AAR), poses an interesting challenge to tax professionals in evaluating the role of a Protocol in interpreting Tax Treaties.
2. The Applicant in this case, Steria (India) Ltd [‘S’] is an Indian public company stated to be a leading provider of IT driven business services for its clients’ core business processes.
Groupe Steria SCA ['SF'], is a French partnership firm. SF centralizes technical skills to carry on management functions such as legal finance, human resources, communication risk control, information systems, controlling and consolidation, delivery and industrialization, technology and the management information services etc.
‘S’ entered into a Management Services Agreement with ‘SF,’ whereby ‘SF’ provides ‘S’ various management services with a view to rationalize and standardize its Indian business practices in accordance
with the international best practices.
3. In this factual situation, ‘S’ sought a ruling of the Authority on the following questions:-
1. “ On the facts and circumstances of the case, whether the payment made by applicant ‘S’ for the management services provided by ‘SF’ will not be taxable in India in the hands of ‘SF’ as per the provisions of the DTAA entered into between India and France?”
2. “On the facts and circumstances of the case, if the consideration for management services is not subject to tax in the hands of ‘SF’ in India, whether the applicant will be liable to withhold tax as per the provisions of section 195 from the payments made / to be made to ‘SF’ under the Management Services Agreement?”
4. Before the AAR, it was not in dispute that the services rendered being management services were classifiable as Technical Services both under Section 9 (1)(vii) of the Income Tax Act and Article 13 of the DTAA between India and France. It was submitted that ‘SF’ being a non-resident in India and tax resident of France, was entitled to be governed by the provisions of India-France DTAA as per provision of section 90(2), to the extent they are more beneficial as compared to the provisions of the Act.
The attention of the AAR was drawn to the Most favoured Nation (MFN) clause 7 of the Protocol signed along with the Indo-France DTAA, which read as under :-
“ In respect of Articles 11 (Dividend), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), 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, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or scope more restricted than the rate of scope (this appears a misprint – the correct words should be rate or scope ) provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Convention, Agreement or Protocol enter in to force, which ever enters in to force later.”
The Applicant argued that though there was no ‘make available’ condition in Article 13 (Fees for Technical Services) of the Indo-France DTAA, such condition existed in the corresponding Article 13 (4)(c) of the subsequently signed Indo-UK DTAA. According to the Applicant, by virtue of this development, ‘SF’ also became entitled to the benefit of the ‘make available condition’ on account of the MFN clause in the Protocol to the Indo-France DTAA,
The Applicant submitted that in its instant case ‘SF’ had not made available any technical knowledge, experience skill, know-how or processes to S and therefore, the payments made by it to ‘S’ did not constitute Fees for Technical Services under Article 13 of the Indo-France DTAA. The Applicant therefore proposed to the AAR that ‘SF’ being a non-resident in India and tax resident of France, was entitled to be governed by the provisions of India-France DTAA as per provision of section 90(2), to the extent they are more beneficial as compared to the provisions of the Income Act and in these circumstances, payments made to ‘SF’ were not taxable as Fees for Technical Services .
5. The Revenue, on the other hand, submitted that fees for technical services includes fees for managerial, technical or consultancy nature and the services rendered by ‘SF’ falls under the broad definition of technical services both as per provisions of the Act as well as under the India-France DTAA. There was more particularly so because there was no requirement of ‘make available’ under article 13 of the DTAA between India and France.
The Revenue also disputed the Applicant’s version that ‘SF’ did not make ‘make available’ technical knowledge to the resident company. According to the Revenue, both ‘SF’ and “S” interacted through their employees and in the process, ‘S’ benefitted from the consulting provided by ‘SF’s employees. The knowledge/skill of employees of Applicant company improved through this interaction, consultation, training etc. provided by the non-resident company and in this process, the knowledge/skill/know-how was made available by ‘SF’ to ‘S’.
6. In its ruling, the AAR has held that the benefit of the MFN clause was not available to ‘SF” with regard to the ‘make available’ condition. The findings of the AAR are summarized hereunder:-
(a) The Applicant does not dispute the managerial services rendered were technical services as defined in the Act and the Article 13 of the DTAA between India and France. The Applicant has canvassed its case solely on the basis of the Protocol to the Tax Treaty between Indian and France.
(b) According to the AAR, a Protocol cannot be treated as the same with the provisions contained in the treaty itself, though it may be an integral part of the Treaty. What is stated by the Protocol is for India to limit its taxation at source for the detail items mentioned therein. The restrictions are on the rates and ‘make available’ clause cannot be read in the items.
(c) According to the AAR, changes in the Treaty are being giving effect by Notifications only.
On the basis of the Protocol, a Notification No.9602 [F.No.501/16/80-FTD], dated 6-9-1994 as amended by Notification No. SO 650(E), dated 10-7-2000 was issued by Govt. of India. {Readers may refer to the text of notification dated 10-7-2000 in Annexure}
(The said Notifications meant to implement the Protocol signed with Indo-France DTAA to align it with lower rates of taxation charged on Dividends, Interest, Royalties, Fees for Technical Services in DTAAs signed by India with Germany and United States, both of which were OECD Members.)
According to the AAR, these Notifications did not include anything about the ‘make available’ provision. If the intention of the Protocol or the Government was to include ‘make available’ clause in the Tax Treaty between India and France, it should have been done so in the said Notifications.
(d) Tax Treaties are between two sovereign nations . Every country has a particular relation with another countries and same treatment are not given to all the countries. Say, for example, definitions of fees for technical services are more restrictive with some countries than the others. Every Treaty has particular purpose depending on the relationship between the two countries. While agreeing with various judgments that ordinary meaning of the Treaties should be given while interpreting the provision of the Tax Treaties and even to the extent of liberal interpretation of the Treaty, no clause can be imported like ‘make available’ in the Treaty so as to change tax complexion of the Treaty provision.
(e) Protocol or Memorandum of Association can be made use for interpreting provision of the Treaty, it will not be correct/proper to import words, phrases or clause that is not available into the Treaties between two Sovereign nations, on the basis of Treaties with another countries.
(f) In this particular case, it may be stated at the most that India is under obligation as per the terms of the Protocol to limit its tax rate or rate of scope as was done in the notification , but such type of action will not be within the purview of this Authority.
(g) The submission of the Applicant that the services being managerial, which was omitted in the definition of fees for technical services in the revised Indo-UK DTAA entered in 1993, the managerial services rendered by the Applicant will also automatically omitted in the definition of fees for technical services under the Tax Treaty between Indo-France by application of the Protocol, was also accepted by the AAR for the reasons cited above regarding application of the Protocol in the Treaty.
Based on the above observations, the AAR has held that the payments made by the Applicant to ‘SF’ were taxable as Fees for Technical Services and that Applicant was liable to deduct tax at sources u\s 195 on these payments.
7. It is true that authorities have given tax payers the benefit of the MFN clause in context of the India treaties with OECD countries. The instances of such rulings may be found in the decisions of Karnataka High Court in CIT vs. ISRO Satellite Centre [2013] 35 taxmann.com 352 [Karn], Poonawala Aviation Pvt. Ltd [2012] 343 ITR 202 [AAR] and Idea Cellular Ltd. [2012] 343 ITR 381 [AAR].
But, in all these cases, the issue, whether a change in the terms of DTAA can be allowed only there is specific notification issued to the amending effect, was not under consideration.
Whereas I am not faulting the decision of the AAR in the Steria case, I am only asking the Readers to examine whether a different view can be taken on the lines proposed by me hereunder.
8. According to me, it should not be seen as a rule that a Protocol is only a mere interpretative aid to the Treaty. On the other hand, it can ably supplement the Treaty by adding substantive content to the Treaty. [By substantive content, I mean that content which determines or varies the legal rights of parties.].
The substantive content added by the Protocol effectively amalgamates with the Treaty and thereby becomes an integral part of the same. To the extent of this substantive content added, the legal rights of tax payers created in the Treaty would get amended or even redefined by the Protocol.
This is precisely what the MFN clause in the Protocol does to the Treaty. It responds to a situation where the Treaty has to revise in order to align itself to a more favourable tax treatment given by the Treaty partner to a third State. The rights of the Treaty partner are favourable enhanced by this revision.
9. However, the manner in which the revision will take place, will depend on the intention of the Treaty partners as formalized in the Protocol.
According to me, a revision of the Treaty triggered by the MFN clause can take place in two ways :-
In the first case, the Protocol may provide a mechanism by which that the Treaty will automatically ambulate to align with the more favourable treatment given by the Treaty partner to the Third State. In such case, the Treaty should be seen as ‘self updating’. No subsequent Protocol is required to be negotiated to amend the Treaty as there is built-in ‘self-revision’ mechanism in the original Protocol.
In the second case, the Protocol may require that the amendments to the Treaty would have to be bilaterally negotiated by the Treaty partners. In this situation, the amendments to the Treaty are not automatic and have to be bilaterally agreed in a subsequent Protocol.
In short, whether the Treaty will ‘ self- amend’ or will have to be bilaterally amended – will depend on the intention of the Treaty partners – to be gathered from the language in which the MFN clause is couched in the Protocol.
10. Sometimes, the provision for automatic revision may be tangibly clear by use of the expression ‘automatically’ or so in the MFN clause. This has been observed in the MFN clause in the Protocol to the Czech Republic-Bulgaria DTTA of 1996.
Yet, according to me, the absence of the word ‘automatically’ does necessarily suggest the converse – that the revision is otherwise not automatic . In my view, if the provisions of the Protocol vest the tax payer of the State, which is the beneficiary of the MFN clause, with a right to concessional tax treatment and this right is not made conditional or subject to requirement of further bilateral negotiations between the Treaty partners, then it may be assumed that the right is final without requiring any further procedure for its implementation. In such circumstance, the Treaty should be seen as automatically self-revising without any further procedure.
11. It is in light of the above discussion, the Readers may test whether – when the MFN clause in Protocol to the Indo-France DTTA is triggered, the Treaty automatically updates to the triggered situation or not.
This proposition, more particularly, assumes importance in context of section 90 (1) of the Indian Income Tax Act. As per this section, the Central Government may enter in to Double Taxation Avoidance Agreement with any country outside India and may by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
The AAR in the Steria case noted that as per the practice followed in India, changes in the DTAAs are implemented by way of notifications amending the DTAA.
12. In my view is that if the DTAA is self updating, no new notification is required to administer its subsequent updates. This is because the original DTAA (along with the contemporary Protocol) has been ‘implemented’ by notification under which the DTAA was initialized, As a part and parcel of this implementation, the MFN clause in the Protocol also gets ‘implemented’ causing the DTAA to also become ‘implemented’ as an automatically self updating Treaty.
In short, if a self updating Treaty is ‘implemented’ under the original notification and no further notification is required u\s 90 (1) for subsequent updates.
This is the view that I wish the Readers to examine.
13. In the Steria case, the MFN clause 7 of the Protocol signed along with the Indo-France DTAA, read as under :-
“ In respect of Articles 11 (Dividend), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), 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, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or scope more restricted than the rate of scope ( this appears a misprint – the correct words should be rate or scope ) provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Convention, Agreement or Protocol enter in to force, which ever enters in to force later.”
14. A reading of the clause should suggest that if the MFN clause is triggered on account of a more favourable treatment given by India to a third State, which is an OECD member, then similar treatment will also be carried under Article 13 (Royalties, fees for technical services ……) to French tax resident. Once the MFN clause triggered, the transition of the MFN treatment from the DTAA to the hands of the French tax payer is not fettered by any pre-conditions and therefore, appears to me as automatic.
In this scenario, a view can be taken that no subsequent notification is required u\s 90 (1) of the Indian Income Tax Act to implement the MFN clause for the following reasons:-
(a) Firstly, the Indo-France DTAA has become a self updating Treaty by virtue of the MFN clause in the Protocol. The updating is automatic once the MFN clause is triggered.
(b) Secondly, the Indo-France DTAA, as a self updating Treaty, has been implemented by the original notification when the DTAA was initialized in full compliance with the provisions of section 90 (1).
(c) Thirdly, no further implementation is required by subsequent notifications for updates to the DTAA as the DTTA is fully implemented as a self-updating Treaty.
(d) Fourthly, the DTAA, being self updating, was self sufficient and fully resourced to confer the French tax payer the benefit of the MFN clause.
15. If the Readers can agree with the above propositions, then it should follow that the subsequent Notification no. S.O. 650 (E) dated 10-7-2000, professing to amend Article 13 of the Indo-France DTAA become only clarificatory and not substantive in character. The notification cannot be said to amend the Treaty as the Treaty, being self updating, as already amended itself.
The fact that the subsequent notification referred only to concessional rates of taxing Fees for Technical Services under Article 13 and did not deal with issue of the scope of this Article changing in context of the MFN clause in the Protocol – should therefore not have made a difference to the Applicant’s case before the AAR. This is because the Applicant ought to have been entitled to the benefit of the MFN clause by virtue of the DTAA being self-updating and recourse to the subsequent notification was not required under section 90 (1) of the Indian Income Tax Act.
16. Article 13 (4) of the Indo-France DTAA and the Indo-UK DTAA defines what constitutes “fees for technical services” and thereby determines the scope of taxing an item of income under this Article. Article 13 (4) of the Indo-UK DTAA does include within the scope of “fees for technical services” managerial services. It also excludes from its scope technical and consultancy services, which do not make available technical knowledge, experience, skill or processes.
India by signing the DTAA with UK, an OECD country has restricted the scope of taxing managerial services as “fees for technical services” under Article 13, thereby conferring UK with a more favourable tax treatment than France.
In these circumstances, in the case before the AAR, ‘SF” ought to have been entitled to the benefit of the MFN clause in full as canvassed by the Applicant.
This is the possible view which the Readers may consider.
Annexure
2. The Applicant in this case, Steria (India) Ltd [‘S’] is an Indian public company stated to be a leading provider of IT driven business services for its clients’ core business processes.
Groupe Steria SCA ['SF'], is a French partnership firm. SF centralizes technical skills to carry on management functions such as legal finance, human resources, communication risk control, information systems, controlling and consolidation, delivery and industrialization, technology and the management information services etc.
‘S’ entered into a Management Services Agreement with ‘SF,’ whereby ‘SF’ provides ‘S’ various management services with a view to rationalize and standardize its Indian business practices in accordance
with the international best practices.
3. In this factual situation, ‘S’ sought a ruling of the Authority on the following questions:-
1. “ On the facts and circumstances of the case, whether the payment made by applicant ‘S’ for the management services provided by ‘SF’ will not be taxable in India in the hands of ‘SF’ as per the provisions of the DTAA entered into between India and France?”
2. “On the facts and circumstances of the case, if the consideration for management services is not subject to tax in the hands of ‘SF’ in India, whether the applicant will be liable to withhold tax as per the provisions of section 195 from the payments made / to be made to ‘SF’ under the Management Services Agreement?”
4. Before the AAR, it was not in dispute that the services rendered being management services were classifiable as Technical Services both under Section 9 (1)(vii) of the Income Tax Act and Article 13 of the DTAA between India and France. It was submitted that ‘SF’ being a non-resident in India and tax resident of France, was entitled to be governed by the provisions of India-France DTAA as per provision of section 90(2), to the extent they are more beneficial as compared to the provisions of the Act.
The attention of the AAR was drawn to the Most favoured Nation (MFN) clause 7 of the Protocol signed along with the Indo-France DTAA, which read as under :-
“ In respect of Articles 11 (Dividend), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), 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, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or scope more restricted than the rate of scope (this appears a misprint – the correct words should be rate or scope ) provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Convention, Agreement or Protocol enter in to force, which ever enters in to force later.”
The Applicant argued that though there was no ‘make available’ condition in Article 13 (Fees for Technical Services) of the Indo-France DTAA, such condition existed in the corresponding Article 13 (4)(c) of the subsequently signed Indo-UK DTAA. According to the Applicant, by virtue of this development, ‘SF’ also became entitled to the benefit of the ‘make available condition’ on account of the MFN clause in the Protocol to the Indo-France DTAA,
The Applicant submitted that in its instant case ‘SF’ had not made available any technical knowledge, experience skill, know-how or processes to S and therefore, the payments made by it to ‘S’ did not constitute Fees for Technical Services under Article 13 of the Indo-France DTAA. The Applicant therefore proposed to the AAR that ‘SF’ being a non-resident in India and tax resident of France, was entitled to be governed by the provisions of India-France DTAA as per provision of section 90(2), to the extent they are more beneficial as compared to the provisions of the Income Act and in these circumstances, payments made to ‘SF’ were not taxable as Fees for Technical Services .
5. The Revenue, on the other hand, submitted that fees for technical services includes fees for managerial, technical or consultancy nature and the services rendered by ‘SF’ falls under the broad definition of technical services both as per provisions of the Act as well as under the India-France DTAA. There was more particularly so because there was no requirement of ‘make available’ under article 13 of the DTAA between India and France.
The Revenue also disputed the Applicant’s version that ‘SF’ did not make ‘make available’ technical knowledge to the resident company. According to the Revenue, both ‘SF’ and “S” interacted through their employees and in the process, ‘S’ benefitted from the consulting provided by ‘SF’s employees. The knowledge/skill of employees of Applicant company improved through this interaction, consultation, training etc. provided by the non-resident company and in this process, the knowledge/skill/know-how was made available by ‘SF’ to ‘S’.
6. In its ruling, the AAR has held that the benefit of the MFN clause was not available to ‘SF” with regard to the ‘make available’ condition. The findings of the AAR are summarized hereunder:-
(a) The Applicant does not dispute the managerial services rendered were technical services as defined in the Act and the Article 13 of the DTAA between India and France. The Applicant has canvassed its case solely on the basis of the Protocol to the Tax Treaty between Indian and France.
(b) According to the AAR, a Protocol cannot be treated as the same with the provisions contained in the treaty itself, though it may be an integral part of the Treaty. What is stated by the Protocol is for India to limit its taxation at source for the detail items mentioned therein. The restrictions are on the rates and ‘make available’ clause cannot be read in the items.
(c) According to the AAR, changes in the Treaty are being giving effect by Notifications only.
On the basis of the Protocol, a Notification No.9602 [F.No.501/16/80-FTD], dated 6-9-1994 as amended by Notification No. SO 650(E), dated 10-7-2000 was issued by Govt. of India. {Readers may refer to the text of notification dated 10-7-2000 in Annexure}
(The said Notifications meant to implement the Protocol signed with Indo-France DTAA to align it with lower rates of taxation charged on Dividends, Interest, Royalties, Fees for Technical Services in DTAAs signed by India with Germany and United States, both of which were OECD Members.)
According to the AAR, these Notifications did not include anything about the ‘make available’ provision. If the intention of the Protocol or the Government was to include ‘make available’ clause in the Tax Treaty between India and France, it should have been done so in the said Notifications.
(d) Tax Treaties are between two sovereign nations . Every country has a particular relation with another countries and same treatment are not given to all the countries. Say, for example, definitions of fees for technical services are more restrictive with some countries than the others. Every Treaty has particular purpose depending on the relationship between the two countries. While agreeing with various judgments that ordinary meaning of the Treaties should be given while interpreting the provision of the Tax Treaties and even to the extent of liberal interpretation of the Treaty, no clause can be imported like ‘make available’ in the Treaty so as to change tax complexion of the Treaty provision.
(e) Protocol or Memorandum of Association can be made use for interpreting provision of the Treaty, it will not be correct/proper to import words, phrases or clause that is not available into the Treaties between two Sovereign nations, on the basis of Treaties with another countries.
(f) In this particular case, it may be stated at the most that India is under obligation as per the terms of the Protocol to limit its tax rate or rate of scope as was done in the notification , but such type of action will not be within the purview of this Authority.
(g) The submission of the Applicant that the services being managerial, which was omitted in the definition of fees for technical services in the revised Indo-UK DTAA entered in 1993, the managerial services rendered by the Applicant will also automatically omitted in the definition of fees for technical services under the Tax Treaty between Indo-France by application of the Protocol, was also accepted by the AAR for the reasons cited above regarding application of the Protocol in the Treaty.
Based on the above observations, the AAR has held that the payments made by the Applicant to ‘SF’ were taxable as Fees for Technical Services and that Applicant was liable to deduct tax at sources u\s 195 on these payments.
7. It is true that authorities have given tax payers the benefit of the MFN clause in context of the India treaties with OECD countries. The instances of such rulings may be found in the decisions of Karnataka High Court in CIT vs. ISRO Satellite Centre [2013] 35 taxmann.com 352 [Karn], Poonawala Aviation Pvt. Ltd [2012] 343 ITR 202 [AAR] and Idea Cellular Ltd. [2012] 343 ITR 381 [AAR].
But, in all these cases, the issue, whether a change in the terms of DTAA can be allowed only there is specific notification issued to the amending effect, was not under consideration.
Whereas I am not faulting the decision of the AAR in the Steria case, I am only asking the Readers to examine whether a different view can be taken on the lines proposed by me hereunder.
8. According to me, it should not be seen as a rule that a Protocol is only a mere interpretative aid to the Treaty. On the other hand, it can ably supplement the Treaty by adding substantive content to the Treaty. [By substantive content, I mean that content which determines or varies the legal rights of parties.].
The substantive content added by the Protocol effectively amalgamates with the Treaty and thereby becomes an integral part of the same. To the extent of this substantive content added, the legal rights of tax payers created in the Treaty would get amended or even redefined by the Protocol.
This is precisely what the MFN clause in the Protocol does to the Treaty. It responds to a situation where the Treaty has to revise in order to align itself to a more favourable tax treatment given by the Treaty partner to a third State. The rights of the Treaty partner are favourable enhanced by this revision.
9. However, the manner in which the revision will take place, will depend on the intention of the Treaty partners as formalized in the Protocol.
According to me, a revision of the Treaty triggered by the MFN clause can take place in two ways :-
In the first case, the Protocol may provide a mechanism by which that the Treaty will automatically ambulate to align with the more favourable treatment given by the Treaty partner to the Third State. In such case, the Treaty should be seen as ‘self updating’. No subsequent Protocol is required to be negotiated to amend the Treaty as there is built-in ‘self-revision’ mechanism in the original Protocol.
In the second case, the Protocol may require that the amendments to the Treaty would have to be bilaterally negotiated by the Treaty partners. In this situation, the amendments to the Treaty are not automatic and have to be bilaterally agreed in a subsequent Protocol.
In short, whether the Treaty will ‘ self- amend’ or will have to be bilaterally amended – will depend on the intention of the Treaty partners – to be gathered from the language in which the MFN clause is couched in the Protocol.
10. Sometimes, the provision for automatic revision may be tangibly clear by use of the expression ‘automatically’ or so in the MFN clause. This has been observed in the MFN clause in the Protocol to the Czech Republic-Bulgaria DTTA of 1996.
Yet, according to me, the absence of the word ‘automatically’ does necessarily suggest the converse – that the revision is otherwise not automatic . In my view, if the provisions of the Protocol vest the tax payer of the State, which is the beneficiary of the MFN clause, with a right to concessional tax treatment and this right is not made conditional or subject to requirement of further bilateral negotiations between the Treaty partners, then it may be assumed that the right is final without requiring any further procedure for its implementation. In such circumstance, the Treaty should be seen as automatically self-revising without any further procedure.
11. It is in light of the above discussion, the Readers may test whether – when the MFN clause in Protocol to the Indo-France DTTA is triggered, the Treaty automatically updates to the triggered situation or not.
This proposition, more particularly, assumes importance in context of section 90 (1) of the Indian Income Tax Act. As per this section, the Central Government may enter in to Double Taxation Avoidance Agreement with any country outside India and may by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
The AAR in the Steria case noted that as per the practice followed in India, changes in the DTAAs are implemented by way of notifications amending the DTAA.
12. In my view is that if the DTAA is self updating, no new notification is required to administer its subsequent updates. This is because the original DTAA (along with the contemporary Protocol) has been ‘implemented’ by notification under which the DTAA was initialized, As a part and parcel of this implementation, the MFN clause in the Protocol also gets ‘implemented’ causing the DTAA to also become ‘implemented’ as an automatically self updating Treaty.
In short, if a self updating Treaty is ‘implemented’ under the original notification and no further notification is required u\s 90 (1) for subsequent updates.
This is the view that I wish the Readers to examine.
13. In the Steria case, the MFN clause 7 of the Protocol signed along with the Indo-France DTAA, read as under :-
“ In respect of Articles 11 (Dividend), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), 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, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or scope more restricted than the rate of scope ( this appears a misprint – the correct words should be rate or scope ) provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Convention, Agreement or Protocol enter in to force, which ever enters in to force later.”
14. A reading of the clause should suggest that if the MFN clause is triggered on account of a more favourable treatment given by India to a third State, which is an OECD member, then similar treatment will also be carried under Article 13 (Royalties, fees for technical services ……) to French tax resident. Once the MFN clause triggered, the transition of the MFN treatment from the DTAA to the hands of the French tax payer is not fettered by any pre-conditions and therefore, appears to me as automatic.
In this scenario, a view can be taken that no subsequent notification is required u\s 90 (1) of the Indian Income Tax Act to implement the MFN clause for the following reasons:-
(a) Firstly, the Indo-France DTAA has become a self updating Treaty by virtue of the MFN clause in the Protocol. The updating is automatic once the MFN clause is triggered.
(b) Secondly, the Indo-France DTAA, as a self updating Treaty, has been implemented by the original notification when the DTAA was initialized in full compliance with the provisions of section 90 (1).
(c) Thirdly, no further implementation is required by subsequent notifications for updates to the DTAA as the DTTA is fully implemented as a self-updating Treaty.
(d) Fourthly, the DTAA, being self updating, was self sufficient and fully resourced to confer the French tax payer the benefit of the MFN clause.
15. If the Readers can agree with the above propositions, then it should follow that the subsequent Notification no. S.O. 650 (E) dated 10-7-2000, professing to amend Article 13 of the Indo-France DTAA become only clarificatory and not substantive in character. The notification cannot be said to amend the Treaty as the Treaty, being self updating, as already amended itself.
The fact that the subsequent notification referred only to concessional rates of taxing Fees for Technical Services under Article 13 and did not deal with issue of the scope of this Article changing in context of the MFN clause in the Protocol – should therefore not have made a difference to the Applicant’s case before the AAR. This is because the Applicant ought to have been entitled to the benefit of the MFN clause by virtue of the DTAA being self-updating and recourse to the subsequent notification was not required under section 90 (1) of the Indian Income Tax Act.
16. Article 13 (4) of the Indo-France DTAA and the Indo-UK DTAA defines what constitutes “fees for technical services” and thereby determines the scope of taxing an item of income under this Article. Article 13 (4) of the Indo-UK DTAA does include within the scope of “fees for technical services” managerial services. It also excludes from its scope technical and consultancy services, which do not make available technical knowledge, experience, skill or processes.
India by signing the DTAA with UK, an OECD country has restricted the scope of taxing managerial services as “fees for technical services” under Article 13, thereby conferring UK with a more favourable tax treatment than France.
In these circumstances, in the case before the AAR, ‘SF” ought to have been entitled to the benefit of the MFN clause in full as canvassed by the Applicant.
This is the possible view which the Readers may consider.
Annexure
Text of Amending Notification no. S.O. 650 (E) dated 10-7-2000.
Whereas the Convention between the Republic of India and the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital came into force on the 1st day of August, 1994, after the notification by both the Contracting States to each other of the completion of the procedures required under their laws for bringing into force the said Convention.
And whereas the Central Government in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1969) and section 44A of the Wealth-tax Act, 1957 (27 of 1957), had directed that all the provisions of the said Convention annexed to the notification of the Government of India in the Ministry of Finance (Department of Revenue) (Foreign Tax Department) No. G.S.R. 681(E), dated 7th September, 1994, shall be given effect to in the Union of India.
And whereas paragraph 7 of the Protocol dated 29th September, 1992, to the aforesaid Convention provides that if after the 1st day of September, 1989, under any Convention Agreement or Protocol concluded between India and a third State which is a member of the Organisation for Economic Co-operation and Development, India should limit its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then, as from the date on which the Convention between India and France or the relevant India Convention, Agreement or Protocol enters into force, whichever enters into force later, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention ;
And whereas in the Convention between India and Germany which entered into force on the 26th October, 1996, and the Convention between India and the United States of America which entered into force on the 18th December, 1990, which States are members of the Organisation for Economic Co-operation and Development, the Government of India has limited the taxation at source on dividends, interest, royalties, fees for technical services and payments for the use of equipment to a rate lower or a scope more restricted than that provided in the Convention between India and France on the said items of income ;
Now, therefore, in exercise of the powers conferred under section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Convention notified by the said notification which are necessary for implementing the aforesaid Convention between India and France, namely :—
I. With effect from the 1st April, 1997, for the existing paragraph 2 of article 11 relating to "Dividends", the following paragraph shall be read:
"2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends."
II. With effect from the 1st April, 1995, for the existing paragraph 2 of article 12 relating to "Interest", the following paragraph shall be read:
"2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed —-
III. With effect from the 1st April, 1997, for paragraph 2 of article 12 relating to "Interest", referred to in paragraph II above, the following paragraph shall be read:
(a)10 per cent of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bona fide banking or financial business or an insurance company or by an enterprise which holds directly or indirectly at least 10 per cent of the capital of the company paying interest ; 15 per cent of the gross amount of the interest in all other cases."
"2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest."
IV. With effect from the 1st April, 1995, for the existing paragraph 2 of article 13 relating to "Royalties and fees for technical services and payments for the use of equipment", the following paragraph shall be read:
"2. However, such royalties, fees and payments may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed—
V. With effect from the 1st April, 1997, for paragraph 2 of article 13 relating to "Royalties and fees for technical services and payments for the use of equipment", referred to in paragraph IV above, the following paragraph shall be read :
(a)in the case of royalties and fees 20 per cent of the gross amount of such royalties or fees ; and in the case of payments referred to in paragraph 5 of this article, 10 per cent of the gross amount of such payments."
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