The enforcement of double tax avoidance agreements under the MFN clause requires a legislative notification and cannot automatically apply based on later OECD membership of third countries.

JUDGMENT :

S. RAVINDRA BHAT, J.

1. The present batch of appeals arise from decisions of the Delhi High Court involving interpretation of the Most Favoured Nation (MFN) clause contained in various Indian treaties with countries that are members of the Organisation for Economic Cooperation and Development (hereafter ‘OECD’). This clause provides for lowering of rate of taxation at source on dividends, interest, royalties or fees for technical services (hereafter ‘FTS’) as the case may be, or restriction of scope of royalty/FTS in the treaty, similar to concession given to another OECD country subsequently. The bilateral treaties in question are between India and Netherlands, France, and Switzerland, respectively. Broadly, the issues arising are whether there is any right to invoke the MFN clause when the third country with which India has entered into a Double Tax Avoidance Agreement (hereafter ‘DTAA’) was not an OECD member yet (at the time of entering into such DTAA) and secondly whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is issued.

(I) Facts

2. One of the first judgments¹ [By judgment dated 28.07.2016 passed by the Delhi High Court in W.P. (C) No. 4793/2014] challenged, in this batch of appeals by special leave, relates to Steria India. Before the Authority for Advance Ruling (“AAR”), Steria contended that having regard to Clause 7 of the Protocol to the India-France DTAA the more restrictive definition of the expression ‘fees for technical services’ appearing in the India-UK DTAA, must be read as forming part of the India-France DTAA as well. The AAR, by the impugned order, disagreed with Steria. It ruled that the Protocol could not be treated as forming part of the DTAA itself. It further held that restrictions imposed by the Protocol were only to limit the taxation at source for the specific items mentioned therein; the restriction was only on the rates. Further, the ‘make available’ clause found in the India-UK DTAA could not be read into the expression ‘fee for technical services’ occurring in the India-France DTAA unless there was a notification under Section 90 of the INCOME TAX ACT , 1961 issued by the Union Government to incorporate the more restrictive provisions of the India-UK DTAA into the India-France DTAA. In other words, Steria’s plea that Clause 7 of the Protocol did not require any separate notification and could straightway be operationalised, was not accepted by the AAR. Upon challenge in a writ petition before the High Court, this was reversed; the court accepted Steria’