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AAR provides restricted interpretation of MFN clause under Tax Treaty
In a recent case The Authority for Advance Rulings (AAR) held that ‘make available’ clause cannot be imported through the Most Favoured Nation (MFN) clause in the India-France Tax Treaty. Taxand India examines the case which led to this decision.
The applicant entered into a Management Services Agreement (MSA) with Steria France, a non-resident for the purposes of the Act and a tax resident of France for the purposes of the India-France Tax Treaty. Services were provided through telephone, fax, e-mail etc and no personnel of Steria France visited India for provision of such services. Furthermore the relationship between the parties was that of independent contractors and no party had the right to direct and control the day-to-day activities of the other. Total costs incurred by Steria France were apportioned to various group affiliates on the basis of revenues earned and employee head counts.
Questions before the AAR
- Whether payments made by the applicant for management services provided by Steria France is chargeable to tax in India in the hands of Steria France under the provisions of the India-France Tax Treaty?
- If the payment for management services is not chargeable to tax in India in the hands of Steria France, whether applicant is liable to withhold tax as per the provisions of section 195 of the Act?
- Steria France, a non-resident in India and tax resident of France, was entitled to avail provisions of the India-France Tax Treaty, to the extent such provisions were beneficial to the applicant as compared to provisions of the Act
- Clause 7 of the protocol to India-France Tax Treaty provides that if after 1 September 1989 India in an agreement or convention or treaty it enters into with any other OECD Country limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment, to a rate lower or a scope more restricted than those provided under the India French Tax Treaty, such lower rate or restricted scope would also apply to the India-France Tax Treaty. Since India entered into a treaty with the UK after 1 September 1989 with a restricted scope for FTS the same scope should also apply for India-France Tax Treaty
- Since services rendered by Steria France do not ‘make available’ technical knowledge, experience, skill, know-how or processes such services would not fall within the definition of technical services and hence should not be subject to tax in India
- FTS includes fees for services of managerial, technical or consultancy nature and services rendered by Steria France would fall within the broad definition of technical services under the provisions of the Act and India-France Tax Treaty
- There was no requirement of ‘make available’ clause under Article 13 of the India-France Tax Treaty. Steria France provided services which made available technical knowledge to the applicant. Employees of the applicant were benefitted from consultancy provided by employees of Steria France and knowledge, skill set of employees of the applicant improved through interactions, consultations, training etc. provided by Steria France
- Steria France had a permanent establishment in India and income was taxable under Article 7 of the India-France Tax Treaty
Ruling of the AAR
The AAR concluded that payments made by the applicant for services rendered by Steria France were covered within the definition of FTS both under the provisions of the Act as well as India-France Tax Treaty and so was chargeable to tax in India. Furthermore it was observed by the AAR that the Notification issued by the Government in connection with the India-France Tax Treaty does not include anything concerning the ‘make available’ provision. In this regard the AAR referred to the Notification issued in the context of the India-Netherlands Tax Treaty whereby ’make available’ clause was specifically inserted in the Tax Treaty.
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Also published in Thomson Reuters' Taxnet Pro, 20 June 2014
The ruling highlights the need for Multinationals to be aware of the issues around interpreting protocol annexed to a Tax Treaty. It is interesting to note that application of the protocol to the India-France Tax Treaty seems to be automatic and is not dependent upon any further action by the respective Governments unlike the cases of India-Philippines & India-Switzerland Tax Treaties where a specific enabling action was required from the respective Governments to give effect to the MFN clause. In this context should the issue reach higher Courts for determination, it would be interesting to see whether the Courts would approve of the reliance placed by the AAR on the Notification.