Steria (India) Ltd. vs. CIT
An understanding of the Protocol forming part of the treaty and the most favored nation clause
The Delhi High Court in its recent judgment, (Steria (India) Ltd vs. Commissioner of IncomeTax), dealt with the question of whether a Protocol to the Double Taxation Avoidance Agreement (DTAA) needs to be separately notified when the DTAA, which the Protocol forms part of, was duly notified by the Government under Section 90 of the Income Tax Act, 1961 (Act). The High Court further ruled on the scope of the most favored nation (MFN) clause contained in this protocol.
- The petitioner, an Indian company, entered into an agreement with Groupe Steria SCA (Steria France), a tax resident of France (not having a PE in India), for management services to rationalize and standardize its business conducted in India. Steria France provided these services via telephone, fax, email etc., with no personnel visiting India for this purpose.
- The petitioner, with a view to obtain an advance ruling, filed an application before the Authority of Advance Ruling (AAR) to determine whether the payments made for these managerial services were taxable as fees for technical services (FTS) under Article 13 of the India– France DTAA and consequently whether there arose any withholding tax obligations on the petitioner.
- Article 13 of the India– France DTAA provides for taxation of managerial services as FTS; however, the petitioner contended that in view of Clause 7 of the Protocol to the India– France DTAA, a more restrictive definition of FTS appearing in Article 13 of the India– UK DTAA must be read as forming part of the India– France DTAA and since Article 13 of the India– UK DTAA did not include managerial services while defining the term “FTS,” such restrictive scope was to be read in the India– France DTAA as well. The petitioner also contended that Clause 7 of the Protocol did not require any separate notification and could straightway be operationalized.
- Clause 7 of the Protocol to the India– France DTAA provides that where under the provisions of any convention, agreement or protocol signed after 01 September 1989 between India and any other OECD member state, India limits its taxation at source on dividends, interest, royalties, FTS or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided in the India– France DTAA on the said items of income, the same rate or scope as provided for in that convention, agreement or protocol on the said items of income shall also apply under the India– France DTAA.
The High Court examined the question of whether the Protocol forming part of the India– France DTAA would be applicable only when it was not notified separately by the Government under section 90 of the Act and whether managerial services attracted withholding obligations under Article 13 of the India– France DTAA.
Whether Protocol forms part of DTAA?
The court held that once the DTAA containing the Protocol 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. Thus, the Court rejected the AAR’s conclusion that clause 7 of the Protocol did not automatically become applicable and that there had to be a separate notification incorporating the beneficial provisions of the India– UK DTAA as forming part of the India– France DTAA.
Whether managerial services attracted withholding provision under Article 13 of the India– France DTAA?
The court held that the benefit of the lower rate or restricted scope of FTS as provided for in a DTAA entered into by India with another OECD member country shall apply under the India– France DTAA with effect from the date on which the India– France DTAA or such other DTAA enters into force. Consequently, it was observed that Article 13(4) of the India– UK DTAA clearly excluded managerial services from the scope of FTS and hence, by virtue of the MFN clause, the said services will stand excluded from the ambit of FTS under the India– France DTAA. Thus, the High Court held that payment made by the assessee for managerial services did not attract any withholding obligation on the part of the petitioner.
• While dealing with the petitioner’s application, AAR introduced a certain ambiguity with regard to the interpretation of DTAA, which could have proved hazardous to foreign residents. The recent order by the Delhi High Court clears the air by confirming that the Protocol, which formed the part of the treaty when it was notified, need not be notified separately. The ruling further affirms the view taken by celebrated international author Klaus Vogel who in his commentary on double taxation conventions opined that protocols amending DTAA elaborate and complete the text of the treaty and as such have the binding force equal to that of the principal treaty text.
• The Delhi High Court relied on the order passed by Kolkata ITAT in the case of DCIT vs. ITC Ltd. (2002) 82 ITD 239 wherein it was categorically held that the Protocol is an indispensable part of the treaty with the same binding force as the main clauses therein. It was also followed that clause 7 of the Protocol to the India– France DTAA restricts the scope of taxation of dividend, royalty, interest and FTS income in the source country to the extent of the most restrictive DTAA that India has entered into with any other OECD member country after 01 September 1989.
• The implication of this observation is that not only the India– UK DTAA, but also any other DTAA that India has entered into with a country that incorporates a more restrictive definition with respect to the aforementioned types of income becomes automatically operative on the date of entry into force of such relevant DTAA. Such clauses are commonly known as MFN clauses.