Commercial Courts, Commercial Division and Commercial Appellate Division of the High Court Act, 2016
22 March 2017
The Commercial Courts, Commercial Division and Commercial Appellate Division of the High Court Act, 2016 (Act) was published in the official gazette on 1 January 2016 and was deemed to have come into effect on 23 October 2015. The Act provides for the setting up of dedicated judicial authorities for the adjudication of disputes of a commercial nature of a specified value and matters connected therewith or incidental thereto.
- 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.
- However, the AAR rejected the petitioner’s application and held that the Protocol could not be treated as forming part of the DTAA itself. The AAR also held that the restrictions imposed by the Protocol were only to limit the taxation at source for the specific items mentioned therein and such restrictions were only in respect of rates of taxes. The AAR further held that the more restrictive scope under the India– UK DTAA for FTS could not be read into the meaning of FTS under the India– France DTAA unless there was a notification under section 90 of the Act issued by the Central Government to that effect.
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.
• The changes brought forth by the Act aim to significantly reduce the pendency in courts and improve the ease of doing business in India by setting up specialized courts to adjudicate commercial matters. Commercial Courts/Commercial Divisions have been set up in the following states: Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Jharkhand, Madhya Pradesh, Maharashtra, Meghalaya, Punjab, Telangana, Tripura, Assam, Nagaland, Mizoram, Arunachal Pradesh, Chandigarh and Delhi.
• The Act has introduced a number of changes to the provisions of the CPC in relation to commercial disputes. The un-amended provisions of the CPC continue to apply to disputes other than commercial disputes.
• The changes made to the CPC aim to streamline the process of dispute resolution in India and provide some certainty on timelines. Courts have now been given a mechanism to exercise greater supervision over the timelines in the dispute resolution process.
• The Act has also provided guidance on a number of procedural aspects such as disclosure, discovery and inspection of documents; verification of pleadings; and imposition of costs.