The Central Board of Direct Taxes (CBDT) has issued the clarification regarding MFN clauses in Protocol to India’s DTAAs with certain countries.
The Protocol to India’s Double Taxation Avoidance Agreements (DTAAs) with some of the countries, especially the European States and OECD members (The Netherlands, France, the Swiss Confederation, Sweden, Spain, and Hungary) contains a provision, referred to as the Most-Favoured-Nation (MFN) clause.
Though each MFN clause in these DTAAs has a different formulation, the general underlying provision is that if after the signature/ entry into force (depending upon the language of the MFN clause) of the DTAA with the first State, India enters into a DTAA with another OECD Member State, wherein India limits its source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) to a rate lower or a scope more restricted than the scope provided for those items of income in the DTAA with the first State, such beneficial treatment should also be extended to the First State.
The Central Board of Direct Taxes (CBDT) has received representations seeking clarity on the applicability of the MFN clause (particularly to dividend withholding rates) available in the Protocol to some of the DTAAs with OECD member States. India’s DTAAs with countries, namely Slovenia, Colombia, and Lithuania, provide for the lower rate of source taxation with respect to certain items of income. However, these States were not members of the OECD at the time of the conclusion of their DTAAs with India and have become members of the OECD thereafter.
Both The Netherlands and France have passed the said decree/bulletin without having any bilateral consultation with India. Therefore, these decree/bulletins do not represent the shared understanding of India and the respective treaty partners on the applicability of the MFN clause and have no binding force as far as interpretation of the MFN clause in the respective treaties is concerned. At best these unilateral decree/bulletin only represent the views of the respective governments for providing relief from The Netherlands/France tax. Since these decree/bulletins were passed without any discussion with the Government of India, it would not have any effect on curtailing the tax liability that is payable to the Government of India under the respective tax treaty.
On a plain reading of the MFN clauses in India’s DTAAs especially with respect to the above-mentioned countries, it is clear that there is a requirement that the third State is to be a member of the OECD both at the time of conclusion of the treaty with India as well as at the time of applicability of MFN clause. Therefore, it is clarified that for the applicability of the MFN clause, the third State has to be an OECD Member State on the date of the conclusion of DTAA with India.
It may also be pointed out that the MFN clause in these DTAAs clearly states that the reduced rate takes effect from the date of entry into force of Indian DTAA with the third State. Thus, the declaration in the decree/bulletin/publication of The Netherlands, France, and the Swiss Confederation to make the reduced rate effective from the date of the third State becoming member of DECD subsequent to the entry into force of a DTAA is not in accordance with the relevant provision of the MFN clause in the Protocol. In fact, these countries could not have made it effective from the date of entry into force of Indian DTAA with the third State as the third State was not a member of the DECD on such date of entry into force. This makes it clear that the intention of the MFN clause in the Protocol of the DTAAs is not to give the benefit of India’s DTAA with the third State which was not a member of DECO when India entered into DTAA with it.
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