India: AAR Rulıngs On Interpretation Of MFN Clause And Taxatıon Of IPR Fail High Court's Litmus Test


The Delhi High Court (High Court), in a recent judgment in Steria (India) Ltd v Commissioner of Income Tax1 has held that the narrower definition of fees for technical services (FTS) provided in the India-UK Tax Treaty (UK Treaty) would automatically apply to the India-France Tax Treaty (France Treaty) owing to the Most Favoured Nation (MFN) clause in the Protocol to the France Treaty (Protocol) and no separate notification was required to bring the said clause into effect as it contained self-operational provisions.


Steria India Limited (Petitioner) had entered into a management service agreement with Groupe Steria SCA (Steria France) under which, Steria France was to provide various management services to the Petitioner to rationalise and standardise business conducted by the Petitioner in India.

The Protocol contains an MFN clause, under which if India enters into a tax treaty or Protocol with any other OECD member country after 1 September 1989, which restricts scope or provides for lesser rate of tax inter alia in relation to FTS, such restricted scope or lesser rate of tax would also apply to the France Treaty. The UK Treaty (which was signed after 1 September 1989) had a narrower definition of FTS which (i) excluded managerial services; and (ii) for technical and consultancy services, the definition contained a 'make available' clause. As per the 'make available' clause in the definition of FTS, services which do not 'make available' technical knowledge, experience, skill, know-how etc. to the service recipient enabling the service recipient to apply them independent of the service provider, do not fall within the purview of FTS. The notification giving effect to the Protocol only referred to 'lesser rate of tax' and did not include the 'restricted scope of taxation' in relation to FTS.

The Petitioner had approached the Authority for Advance Ruling (AAR) to obtain  a ruling on whether the payment made by it to Steria France for provision of management services was taxable in India under the provisions of the France Treaty and whether it was required to withhold tax on such payments

The AAR ruled that a Protocol could not be treated the same way as the provisions contained in the treaty itself and that the restricted scope of taxation of FTS, i.e., the 'make available' clause from the UK Treaty could not be read into the definition of FTS under the France Treaty unless the Government issues a specific notification to this effect. Aggrieved by this ruling, the petitioner filed a writ petition before the High Court.

High Court Decision

The High Court reversed the AAR ruling, and held as under:

Automatic operationalisation of the Protocol

The High Court held that the MFN clause in the Protocol itself made it clear that the said clause was self-operational. The High Court also affirmed the decision of the Income Tax Appellate Tribunal in DCIT v ITC Ltd [(2002) 82 ITD 239] which held that the benefit of the restricted scope or lower rate of taxation of FTS under the France Treaty was not dependent on any further actions by the respective Governments.

The High Court also relied on the preamble of the Protocol, which states that the Protocol would form an integral part of the France Treaty and held that once the France Treaty had been notified with a self-operational MFN clause, there was no need for the Protocol itself to be separately notified or for the beneficial provisions between India and any other OECD country to be separately notified to form part of the France Treaty.

Payments towards managerial services not taxable in India under France Treaty

The High Court held that restricted scope of FTS under the UK Treaty (which excludes payments towards managerial services) would apply by virtue of the MFN clause, and that once 'managerial services' were out of the purview of FTS, there was no need to examine if the 'make available' test was satisfied. Thus, payments towards managerial services provided by Steria France could not be categorized as FTS, and hence was not taxable in India under the France Treaty. The High Court did not determine if a permanent establishment of Steria France was constituted in India, as the tax authorities did not contend that the fees payable to Steria France was in the nature of business income, the taxability of which depends on existence of a permanent establishment in India.


This is a welcome ruling dispelling the ambiguity created by the AAR ruling. Depending on the language of the Protocol, where no further action or specific notification is required, the Protocol shall be automatically applicable. For instance, the Protocol to the India – Switzerland tax treaty also contains an MFN clause, however, it requires a specific notification to make it operative.


1 WP(C)4793/2014 and CM APPL9551/2014, order dated 28 July 2016

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