The Pune Bench of Income Tax Appellate Tribunal (ITAT) has held that No Retrospective effect of Central Board of Direct Taxes (CBDT) Circular, requiring separate notification by Government for importing the benefit of Most Favoured Nation (MFN) into Double Taxation Avoidance Agreement (DTAA).
The assessee, GRI Renewable Industries S.L. is a foreign company incorporated in Spain. The return was filed declaring total income of Rs.2,88,38,464/-, comprising of receipt of Rs.2,25,29,742/- from M/s. Shrenik Industries Pvt. Ltd. towards providing technical support, financial support and advice, legal support, commercial support etc., and Rs.63,08,722/- received towards SAP software and implementation of process model. The assessee declared the above amounts as ‘fees for technical services’ and ‘royalties’ respectively, claiming them as covered under Article 13 of the DTAA.
Relying on the Protocol to the DTAA having Most Favoured Nation (MFN) clause along with Article 12 of the Double Taxation Avoidance Agreement between India and Portugal (Portuguese DTAA), the assessee claimed that the above gross receipts of ‘royalties’ and ‘fees for technical services’ were taxable @10% instead of 20% as provided in the DTAA. The AO did not dispute the amount or the nature of income offered by the assessee.
He, however, held that the tax rate of 10% applied by the assessee under Portuguese DTAA could not be applied because section 90(1) specifically requires the issuance of necessary Notification by the Government of India. In order to import an MFN clause from another DT A A having lower rate of tax or narrower scope of definition of certain clause, it is necessary that such importing of clause must be notified. In the absence of any notification of the MFN clause from the Portuguese DTAA, the AO held that the benefit of the relevant Article of the Portuguese DTAA was not available to the assessee in terms of the Protocol and hence, the ‘fees for technical services’ and ‘royalty’ was chargeable to tax at 10% plus applicable Surcharge and Education Cess in terms of section 115A of the Act, which was more beneficial vis-à-vis 20% rate of tax provided in the DTAA. No succor was provided by the Dispute Resolution Panel.
In the final assessment order, the AO taxed the amount of ‘fees for technical Services’ and ‘royalty’ at 10% plus applicable Surcharge and Education cess u/s.115A of the Act as against 20% straight rate in the DTAA. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
The coram of held that it is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect.
“We are confronted with a circular, much less an amendment to the enactment, which attaches a new disability of a separate notification for importing the benefits of an Agreement with the second State into the treaty with first State. Obviously, such a Circular cannot operate retrospectively to the transactions taking place in any period anterior to its issuance. In view of the foregoing discussion, we are satisfied that the requirement of a separate notification for implementing the MFN clause, as per the recent CBDT circular dt. 03-02-2022, cannot be invoked for the year under consideration, which is much prior to the CBDT circular of the year 2022,” the ITAT noted.
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