India: Applying Most Favored Nation Clause, Delhi High Court Allows Import Of UK Treaty Into French Treaty

Last Updated: 10 October 2016
Article by Nangia & Co

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 ('FTS').

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 India.

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 FTS.

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.

Nangia's take

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.


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