The applicability of MFN clause in Indian tax treaties has been subject to debate in recent past. The Central Board of Direct Taxes (“CBDT”) has also recently released a circular dated February 3, 2022, clarifying the applicability of MFN clause present in Indian tax treaties.
The Circular was released in response to the unilateral directives issued by France, Netherlands and Switzerland, notifying that the MFN clause in the Protocols to India’s tax treaties with these countries would have the effect of modifying and reducing India’s withholding rate of tax on dividends as per these treaties to 5% (if the beneficial owner of the dividend is a resident of the other state); on account of the lower 5% rate in India’s tax treaties with Slovenia, Lithuania, and Colombia (all of whom have become members of the OECD on subsequent dates after India’s treaties with France, Netherlands, and Switzerland came into effect). The Circular also seemed to be a clarification from the CBDT on account of judgement of Delhi High Court in the case of Concentrix Services Netherlands B.V. vs. ITO (TDS) on the issue, which had ruled in favour of the taxpayer; thereby granting the reduced withholding rate on account of the MFN clause.
The Circular provides certain conditions on the basis of which benefit of the MFN clause can be extended to the taxpayers, and one of the conditions specified therein is issuance of a separate notification to make the provisions of the Protocol effective. The Circular has referred to Section 90 of the ITA for the genesis of this requirement. It is pertinent to note that the tax authorities have previously also argued this position before the Indian judicial authorities, but have not been successful in this regard.
Recently the Pune Tribunal (“ITAT”) in the case of GRI Renewables Industries SL (ITA No. 202 of 2021) (‘taxpayer’) ruled in favour of the tax payer and allowed the benefit of MFN clause under India-Spain tax treaty.