Restriction in the Most Favoured Nations (MFN) Clause of the India-France DTAA is in relation to rates of taxes, the “make available” condition, as available in the India-UK DTAA, is not included within its purview.
Facts:The Applicant, a public company in India (ICo), was engaged in providing information technology driven services. ICo entered into a management service agreement with Steria France (FCO), a resident of France, for various management services, such as general management, corporate communications, internal audit, finance-related services etc., with a view to rationalise and standardise the business conducted by ICo in India in accordance with international best practices.
FCO provided services offshore through electronic media (telephone, fax, email etc.) and no personnel visited India for provision of the services.
As per the France DTAA fees for technical services (FTS) is defined to mean consideration for any technical, managerial or consultancy services. Though “FTS” is broadly defined in the France DTAA, vide the Protocol to the France DTAA , an Indian resident making a payment to a French resident may apply the MFN Clause to, inter alia, take privilege of a more restricted scope of source taxation or rate of tax present in any subsequent DTAA entered into force by India with an OECD member. As per the France DTAA , FTS was taxable at 20% on gross basis.
Pursuant to the MFN Clause, a Notification1 (France Notification) was issued by the GOI giving effect to the MFN clause which provided for a lower rate of taxation viz., 10%. The France Notification makes no reference to the restricted scope of meaning of FTS.
In a similar notification, in the context of the India-Netherlands DTAA, the MFN benefit has been provided with respect to lower rate, as well as the narrow scope of FTS definition i.e., incorporating ‘make available’ condition.
ICo relied on the India-UK DTAA to import the ‘make available’ condition for taxation of FTS. ICO contended that on an application of the MFN Clause in the Protocol to the France DTAA, the narrower scope of the definition of FTS, as available in the India-UK DTAA , may be applied. Accordingly, since the services do not make available technical knowledge, experience, skill etc., the services rendered should not be regarded as taxable in India.
The Tax Authority, on the other hand, contended that the services are FTS in nature and the ‘make available’ concept is not applicable. In any case, technical knowledge, skill etc., are made available through employee interaction and, hence, the same is taxable in India.
Held:
A Protocol cannot be treated at par with provisions contained in a DTAA itself, though it is an integral part of the DTAA .
The restriction in the MFN clause of the France DTAA is in relation to rates of taxes and the “make available” Clause cannot be read into the Protocol.
Furthermore, the France Notification issued pursuant to the Protocol giving effect to the MFN Clause provides only for a reduced rate of tax and does not include anything about the ‘make available’ clause. Had the intention been so, the same would have been mentioned in the France Notification, comparable to what has been done in the India-Netherlands DTAA . The changes in the France DTAA on the basis of the Protocol were given effect by the France Notification only.
The ‘make available’ Clause cannot be imported in the DTAA to change the complexion of the DTAA provision. A Protocol or Memorandum of Association can be made use of for interpreting the provisions of a DTAA but it is not correct to import words, phrases or clauses not available into a DTAA on the basis of DTAA s with other countries. At the most, India is under obligation, as per the terms of the Protocol, to limit its tax rate or scope as was done in the France Notification, but such type of an action was not within the purview of the AAR.
Since the services rendered by FCo were technical services under the Indian Tax Laws, as also under the France DTAA , the payments fell within the purview of FTS and, hence, were chargeable to tax in India and, accordingly, taxes are required to be withheld.
