SKP Tax Alert
Volume 9 Issue 15 | 18 August 2016
MFN Clause can be used to import benefit for either lower rate or restrictive scope while taxing FTS

Recently, the Delhi High Court in case of Steria (India) Ltd[1] (SIL) held that the Most Favoured Nation (MFN) clause of the Protocol, will form an integral part of the India-France Double Taxation Avoidance Agreement (DTAA) and it will be applicable automatically without any notification. There is no requirement to issue a separate notification incorporating the beneficial provisions of the Convention between India and other OECD countries as forming part of the India- France DTAA. Furthermore, while analysing the Fees for Technical Services (FTS) definition as per India- France DTAA, it is also observed that the entire definition of FTS can be imported from India – UK DTAA based on the MFN clause which excludes the term ‘managerial services’ and provides for ’make available’ clause. Hence, the managerial services provided by Steria France to SIL are not taxable in India.

 Facts of the case
  • Steria (India) Limited  is a public limited company incorporated in India and a tax resident of India. It provides IT driven services for its client's core businesses.
  • Groupe Steria SCA (Steria France) is a Limited Liability Partnership incorporated in France and a tax resident of France.
  • Furthermore, SIL entered into a Management Service Agreement with Steria France. The services rendered by Steria France to SIL included corporate communication services, group marketing services, development services, information system and services, legal services, human relation services, etc.
  • These services were provided by Steria France through telephone, fax, e-mail, etc. and no personnel of Steria France visited India to provide such services.
  • SIL had made an application before the Authority for Advance Ruling(AAR) to determine the taxability of these payments in the hands of Steria France and withholding tax liability of SIL for these payments.
  • SIL contention was that the services rendered by Steria France did not ‘make available’ any technical knowledge, experience, know-how or process to SIL and hence, they were not taxable as FTS under Article 13 of India France DTAA. In making this contention, it imported the restrictive definition of FTS as stated under the India-UK DTAA which contains the ’make available clause’.
  • The basis for SIL importing the restrictive definition of FTS according to the India UK DTAA, was Clause 7 of the India-France DTAA Protocol which provides that if any DTAA or Protocol is signed between India and an OECD member state after 1 September 1989 which limits its taxation at source to FTS, to a rate lower or a scope more restricted than the rate or scope provided in the India France DTAA then the same rate or scope as provided in the other DTAA would apply.
  • The AAR held that the payment made by SIL for the management services to Steria France will be taxable as Fees for Technical Services according to Article 13 of the India-France DTAA and denied the benefit of Clause 7 of the Protocol to the DTAA.
  • The AAR also observed that it would be inappropriate to import words, phrases/clauses which were not a part of the treaty between two states on the basis of treaties with other sovereign states.
  • Consequent to this AAR Ruling, the taxpayer was made liable to pay withholding tax on payments made to Steria France. Against the said order, SIL approached the High Court through writ petition.
Key Issues before the High Court

Whether the payment made by SIL for the management services provided by Steria France will be taxable in India in the hands of Steria France according to the provisions of the DTAA entered into between India and France in light of its Protocol.

Taxpayer’s Contentions
  • According to Section 90(2) of the Act, a taxpayer is entitled to be governed by the provisions of DTAA to the extent they are more beneficial as compared to the provisions of the Act. Accordingly, Steria France was entitled to avail the treaty benefits.
  • Furthermore, it contended that by virtue of Clause 7 of the Protocol between India and France and relying on the India-UK DTAA, the services rendered by Steria France did not satisfy the 'make available' clause and hence the services shall not be liable to tax as per Article 13 of the India – France DTAA.
  • Though there was no 'make available' clause in the India-France Treaty, the make available clause in the India-UK DTAA, which was signed much after 1 September, 1989, would be applicable by virtue of the protocol signed between India and France.
  • India-UK DTAA was signed in January 1993; much later than the India-France DTAA. As per Article 13 of India -UK DTAA, fees for technical services has ‘make available’ clause. Thus, if the services do not make available technical knowledge, they would not be liable to tax as Fees for Technical Services.
Tax Authorities’ Contentions
  • In terms of Clause 7 of the protocol, one cannot rely upon another Convention between India and the OECD member for taking advantage of a more restricted scope and refer to other Conventions to take advantage of lower rate of tax.
  • Furthermore, if a reference has been made to one Convention, then the same convention has to be referred to for both scope and tax purposes. One cannot selectively apply ‘scope’ or ‘rate of tax’.
  • Furthermore, the 'make available' clause found in the Indo-UK DTAA could not be read into the expression 'fees for technical services' occurring in the India-French DTAA unless there was a specific notification under section 90 of the Act issued by the central covernment to incorporate the less restrictive provisions of the Indo-UK DTAA into the India-France DTAA. 
High Court Ruling
  • Disagreeing with the tax authorities’ contention of restrictive interpretation placed on Clause 7 of the Protocol, it observed that the words "a rate lower or a scope more restricted" occurring therein envisages that the benefit could either be on account of lower rate or more restricted scope.
  • Furthermore the wordings “if under any convention, agreement or Protocol signed between India and a third state which is a member of OECD” in Clause 7 of the Protocol, indicate that the most beneficial of the provisions that may be available in other Convention between India and the OECD member country can be availed automatically by virtue of the Protocol.
  • Once the DTAA has been notified and contains the Protocol thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in other Conventions between India and another OECD country to be separately notified.
  • Since the definition of fees for technical services in Article 13 of the India – UK DTAA excludes ‘managerial services’ from its ambit, the payment made by SIL for rendering management services by Steria France shall not be liable to tax in India.
  • Accordingly, the services provided by Steria France did not have to be further examined to understand whether they were “made available” or not.
[1] HIGH COURT AT NEW DELHI  W.P.(C) 4793/2014 & CM APPL. 9551/2014
SKP's comments
  • This Ruling of the Delhi HC comes as a great relief and reaffirms the principle that Protocol of DTAA is a part of the DTAA to carry equal weightage as that of the treaty itself.
  • Furthermore, it also reaffirms the position that the benefit granted by the Protocol to import a restrictive rate of tax or scope from another DTAA signed after signing the convention/treaty would automatically be applicable without any separate notification unless the wordings of the protocol suggest otherwise.
  • For example, the Protocol to India-Switzerland DTAA is not self- operational. It states that in the case of India entering into a Convention with another OECD member restricting the scope or allowing a lower rate of tax, there would be a re-negotiation between India and Switzerland in respect thereof. Hence, in such a scenario, the protocol cannot be considered self-operational.

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