MFN clause is an integral part of DTAA and selfoperational; Delhi HC sets aside decision of AAR

Facts :

a) An application was filed by the Steria India (i.e., petitioner) before the AAR to determine taxability of payment made for the management services provided by Steria France.

b) The Petitioner (i.e., Steria India) was of the view that due to existence of Most Favoured Nation (‘MFN’) clause in India-France DTAA (Clause 7 of the Protocol) the less restrictive definition of FTS‟ appearing in the India-UK DTAA, must be read as forming part of the India-France DTAA as well.

c) The AAR disagreed with the Petitioner. It ruled that the Protocol could not be treated as forming part of the DTAA itself. Further, it held that the “make available” clause found in the India-UK DTAA could not be read into the expression “FTS” occurring in the India-French DTAA unless there was a notification issued by the Govt. to incorporate the less restrictive provisions of the India-UK DTAA into the India-France DTAA.

d) The petitioner filed the writ petition against such ruling of AAR. The Delhi High Court held in favour of assessee as under:

1) The AAR appears to have failed to notice that the wording of clause 7 of the Protocol (i.e., MFN clause) makes it self-operational. Reliance was rightly placed by the Petitioner on the passage (at page 32) in the commentary by Klaus Vogel on "Double Taxation Conventions” to contend that protocols would form part of treaty and their binding force is equal to that of principal text of treaty.

2) We, therefore, are unable to agree with the conclusion of the AAR that the clause 7 of the Protocol, which forms part of the DTAA between India and France, does not automatically become applicable and that there has to be a separate notification incorporating the beneficial provisions of the DTAA between India and UK as forming part of the India- France DTAA.

3) The definition of “FTS” occurring in Article 13(4) of the India-UK DTAA clearly excludes managerial services. Thus, once the expression 'managerial services' is outside the ambit of FTS, then the question of the Petitioner having to deduct tax at source from payment for the managerial services, would not arise. It was, therefore, not necessary to further examine the second part of the definition, viz., whether any of the services envisaged under Article 13(4) of the India-UK DTAA are “made available” to the Petitioner by the DTAA with France.

4) Thus, the order of AAR in Steria (India) Ltd., In re [2014] 45 taxmann.com 281 (AAR - New Delhi)holding that the payment made for the managerial services provided by Steria France should be treated as FTSwas unsustainable in law. - STERIA (INDIA) LTD. V. CIT - [2016] 72 taxmann.com 1 (Delhi)