Recently the Delhi High Court ('the Court') in the case
of Steria India Ltd. ('Steria') relying on the most favored
nation clause under the India - France Double Taxation Avoidance
Agreement ('India–France Tax Treaty) held that payments
made by an Indian company to a French company for management
services does not constitute Fees for Technical Services
Facts of the case
Steria entered into a 'Management Service Agreement'
with its group entity in France ('Steria France'). As per
the agreement, Steria France was to provide various management
services including Corporate Communication Services, Group
Marketing Services, Development Services, Information System and
Services, Legal Services, Human Relation Services etc., with a view
to rationalize and standardize the business conducted by Steria in
Steria filed an application before the Authority of Advance
Ruling ('AAR') so as to confirm if payments made by them to
Steria France under 'Management Service Agreement' will be
taxable as per the provisions of India-France Tax Treaty. The
argument of the assessee was that MFN Clause did not require any
separate notification and could straightway be operationalized. The
AAR rejecting the argument of the assessee held that the Protocol
in the India-France Tax Treaty could not be treated as forming part
of the Treaty. Further, it held that the 'make available'
clause found in the India-UK Tax Treaty could not be read into the
expression 'fee for technical services' occurring in the
India-French Tax Treaty unless a notification was issued by the
Indian tax authorities to incorporate the less restrictive
provisions of the Indo-UK Tax Treaty into the India-France Tax
Treaty, concluding that the payment made for services constitute
Ruling of the Court
On appeal to the Court, it allowed the decision in favor of
Steria. In this decision, the High Court has stated that a Protocol
to a Tax Treaty forms an integral part of the Tax Treaty itself.
Further, the purpose of Clause 7 to the Protocol is to afford to a
party the most beneficial of the provisions that may be available
in another Convention between India and another OECD country.
Accordingly, the benefit derived under the Protocol to India-France
Tax Treaty could accrue in terms of lower rate or a more
restrictive scope under more than one Convention and restrictive
definition of fees for technical services as per India-UK Tax
Treaty would be applicable. The Court also upheld the judgment of
the Kolkata Tribunal in the case of DCIT v. ITC Ltd.
(2002) 82 ITD 239(ITAT Kolkata) wherein also it was
held that benefit of a lower rate or restricted scope of FTS under
the India-France Tax Treaty by virtue of the MFN clause was not
dependent on any further action by the respective governments.
In international economic relations and international politics,
"most favoured nation" means the country which is the
recipient of this treatment must, nominally, receive equal trade
advantages as the "most favoured nation" by the country
granting such treatment. This judgment emphasizes on the fact
that a Protocol forms an integral part of the Tax Treaty and brings
about clarity that no separate notification is required for a
protocol to come into effect, unless provided within the Protocol
itself. Interestingly, India-Switzerland Tax Treaty 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. Accordingly, it is pertinent to
note the language of each Protocol in determining whether it is
self-operational or requires a specific notification.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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