CBDT Circular Prohibiting Tax Benefits under MFN Clause Violates Income Tax Act: ITAT Pune
The ITAT Bench of Pune, comprised of members R.S. Sayal (Vice President) and Partha Sarathi Chaudhury (Judicial Member), ruled that the CBDT Circular, issued in February 2022, requiring a separate notification by the Government of India for importing the benefit of the Most Favoured Nation (MFN) clause into a Double Taxation Avoidance Agreement (DTAA), violated section 90 (1) of the Income Tax Act, 1961. Furthermore, the Bench concluded that because the Circular is in the character of an additional adverse stipulation necessary for taking advantage of the DTAA benefit, it cannot have retroactive effect.
The Assessee, a foreign corporation formed in Spain, claimed the benefit of a lower tax rate of 10% given by the DTAA between India and Portugal by declaring income in the nature of “fees for technical services” and “royalty.” Though the India-Spain DTAA taxes royalty and technical services fees at 20%, the MFN clause in the Protocol to the India-Spain DTAA permits for extending the equivalent benefit of a lower tax rate provided by India to a third country under an Agreement. The Assessing Officer (AO) declined to accept the benefit of the MFN clause, despite the fact that the nature and quantity of revenue were not in dispute, claiming that importing it required a separate Government Notification. In view of section 90 (2) of the Act, the AO disallowed the benefit of a 10% tax rate provided to the Assessee under the MFN clause of the Protocol, taxing the income under section 115A at 10% plus surcharge and cess as opposed to 20% under the India – Spain DTAA. The Assessee appealed the AO’s decision to the ITAT Pune Bench.
In opposition to the Assessee’s claims and in support of its 2022 Circular, the Revenue Department claimed that the requirement of a separate notification issued by India, importing the benefits of a subsequent Treaty into a Treaty with another country, is in accordance with the requirements of section 90(1) of the Act.
Section 90 (1) of the Act gives the Central Government the authority to enter into agreements with foreign governments to avoid double taxation, award tax relief, and establish provisions for their execution. In the existence of such a DTAA, the provisions of the Income Tax Act apply solely to the extent that they are more favourable to the assessee, according to section 90 (2) of the Act.
The Bench rejected the Revenue Department’s position, holding that section 90(1) only provides for the means of notifying an agreement through a Gazetted Notification. The Bench held that when an agreement is notified, all of its constituent elements are automatically notified. The Bench ruled that the Protocol with its MFN clause was validly notified when the India-Spain DTAA was notified under section 90 (1) in 1995, holding that a notice cannot be piecemeal or shortened and that the Protocol containing the MFN clause is an integral element of the India-Spain DTAA.
“When the Agreement between India and Spain was notified on April 21, 1995, the Protocol, which is an integral part of the Agreement, was automatically notified along with it. In such a case, it’s difficult to see why there would be any need for a separate notification for the import of the MFN provision.”
Observing that a CBDT Circular was neither binding on the Tribunal or the Assessee, the Court ruled that the Circular violated section 90 (1) of the Act. The Bench denied the Circular’s retrospective effect, ruling that legislation imposing greater incapacity cannot be retroactive unless there is a clear legislative intent.
In part accepting the Revenue Department’s appeal, the Tribunal ruled that the CBDT Circular, which has no retrospective effect and requires a separate notification for implementation of the MFN clause, could not be used against the Assessee.
To Read Judgment Download PDF Given Below: