Having regard to MFN clause under India-France DTAA, scope of services can be restricted to that under India-USA DTAA. However, since India-USA DTAA does not include ‘managerial services’ in FIS whereas India-French DTAA includes the same in FTS, the restricted scope cannot supply in case of ‘managerial services’.

Having regard to MFN clause under India-France DTAA, scope of services can be restricted to that under India-USA DTAA. However, since India-USA DTAA does not include ‘managerial services’ in FIS whereas India-French DTAA includes the same in FTS, the restricted scope cannot supply in case of ‘managerial services’.

The applicant Indian company (‘ICo’) was whollyowned subsidiary of a French company. The parent French company had another wholly-owned French subsidiary company (‘FrenchCo’). ICo entered into ‘Services Agreement’ with FrenchCo under which, FrenchCo was to provide certain services to ICo and ICo was to reimburse the expenses incurred by FrenchCo for providing these services. In addition to the expenses, ICo was to pay 5% of the reimbursed amount. The payment was to be remitted to France, net of withholding tax and withholding tax, if any, was to be borne by ICo. ICo had also entered into another agreement with FrenchCo which, however, was not the subjectmatter of ruling. ICo sought the ruling of AAR in respect of the taxability of the payments made to FrenchCo and particularly whether they were FTS in terms of Article 13(4) of India-France DTAA (read with the Protocol), or business profits in terms of Article 7 and, if they were business profits, whether they would be taxable as FrenchCo did not have a PE in India in terms of Article 5. Protocol to India-France DTAA contains MFN clause (Paragraph 7) and provides that if India enters into DTAA with an OECD country after 1st September 1989, and the scope or rate of tax under that DTAA is more restricted than that under India-France DTAA, the scope or rate of tax under India-France DTAA would also be restricted. India entered into DTAA with the USA on 12 September 1989 whereunder the scope of services was restricted by inclusion of the phrase ‘make available’. Hence, ICo contended that though India-France DTAA does not contain ‘make available’, the protocol to India-France DTAA should be considered to determine whether the payment is FTS. However, the tax authority contended that only lower rate of tax should be considered and the scope cannot be narrowed by considering the protocol.

Held:

The AAR observed and held as follows. l The fact of the transactions being undertaken on arm’s-length basis should be verified to determine whether income can still be attributed to PE. l In the absence of the phrase ‘make available’ in India-France DTAA, the concept may be borrowed from India-USA DTAA. However, as only technical and consultancy services are covered in India-USA DTAA, the concept of ‘make available’ can apply only in respect of those services. Since Article 13 of India-France DTAA also includes ‘managerial services’, and since it does not stipulate that they should be ‘made available’, the payments for ‘managerial services’ would be taxable as FTS. l Since ‘managerial services’ are specifically dealt with under Article 13, question of treating them as business profits under Article 7 does not arise.