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The Delhi High Court 1 in a recent ruling brought to the fore an important principle that a Protocol to a Double Taxation Agreement (“tax treaty” or “DTA”) is an integral part of the tax treaty and shall have a binding force equal to the main text in the applicable tax treaty for granting benefits.
Groupe Steria SCA (“Steria France”), a limited liability partnership incorporated in France, does not have a taxable presence or permanent establishment in India. Steria India Ltd. (“SIL” or “the taxpayer”) is an Indian resident company that is part of Steria France Group, engaged in the business of information technology services.
Steria France and SIL entered into a Management Service Agreement to render various management services to the taxpayer. The services were broadly categorized as General Management Services including communication, marketing, IT, legal, etc, provided through technology like e-mail etc. without any personnel of Steria France visiting India for such services.
SIL sought a ruling from the Authority of Advance Ruling (“AAR”) to determine the taxability of the payment made to Steria France in respect of management services in India, including applicability of the tax treaty benefit under the India-French tax treaty.
SIL relied on Clause 7 of the Protocol to the India-France tax treaty to contend before the AAR that the less restrictive definition of “fees for technical services” (“FTS”) under the India-U.K. tax treaty should be applied and must be read into the India-France tax treaty under the Most Favored Nation (“MFN”) clause. Applying the rationale of services characterized as managerial in nature that do not make available technical knowledge (as specified in Article 13 of the India-U.K. DTA), the income of Steria France, in the absence of a PE in India, should not be taxable in India under the India-French tax treaty.
The AAR observed that the ‘make available’ clause appearing in the India-U.K. DTA cannot be read into the definition of FTS under the India-France tax treaty unless, the definition is expressly ratified by the Indian Government through a separate notification. The taxpayer, aggrieved by the AAR ruling, denying the tax treaty claim, challenged the AAR ruling before the High Court.
The High Court identified that the purpose of a protocol to a tax treaty is to grant extended benefits to the taxpayer based on the most beneficial provisions of the Convention between the countries. Accordingly, a protocol signed separately between India and France is equally regarded and would form as an integral part of the Convention. The High Court clarified that once the India-France tax treaty is ratified, including para 7 to the protocol with the MFN clause, there is no obligation for a separate notification from the India Government for the protocol to apply, or, where a taxpayer seeks to claim the beneficial tax treaty provisions stated in some other Convention between India and another OECD member country, for a separate notification to be included or form part of the India-France tax treaty.
The Court, relying on Klaus Vogel's Commentary on Double Taxation Conventions, referred to the restrictive definition of “fees for technical services” excluding managerial services under Article 13(4) of the India-U.K. tax treaty. Invoking the MFN clause, the Court in the instant case regarded the services rendered by Steria France as “managerial services” within the terms of the India-U.K. tax treaty and applicable for exclusion under the FTS clause. Accordingly, the Court reversed the AAR ruling and treated such managerial services as not taxable in the absence of Steria France having a PE in India.
The Court established a well settled principle adopted by numerous judicial precedents that a protocol is an integral part of a tax treaty and should be given effect in the same manner as any other substantive part of the tax treaty and the application of more restricted treaty provisions, in a situation where it is so specified by the protocol provision, is automatic.
Shailendra Sharma is a Chartered Accountant in India with a multinational tax consulting firm. Julius Cardozo is a Chartered Accountant in India with a Multinational Corporation.NOTES
1 Steria India Ltd. V. CIT W.P.(C) 4793/2014 & CM APPL. 9551/2014
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