Clarification regarding the Applicability of Most-Favored-Nation (MFN) clause in certain Treaties
The Protocol to India’s Double Taxation Avoidance Agreements (DTAAs) with a portion of the nations, particularly European States and OECD individuals (The Netherlands, France, the Swiss Confederation, Sweden, Spain and Hungary) contains an arrangement, alluded to as the Most-Favored-Nation (MFN) provision. However each MFN proviso in these DTAAs has an alternate plan, the overall basic arrangement is that if after the signature/ entry in force (contingent on the language of the MFN condition) of the DTAA with the main State, India goes into a DTAA with another OECD Member State, wherein India restricts its source tax collection freedoms corresponding to certain items of income to a rate lower or a degree more confined than the extension accommodated those items of income in the DTAA with the main State, such advantageous treatment ought to likewise be reached out to the main State.
In relation to the representation received by CBDT, seeking clarity over the MFN clause, CBDT has clarified their stand vide Circular 3/2022 (F.No. 503/1/2021-FT&TR-I) dated 03.02.2022:
1. To claim the benefits under the MFN clause of DTAA, the third state is to be a member of the OECD both at the time of conclusion of the treaty with India as well as at the time of applicability of the MFN clause.
2. The unilateral decree of a treaty partner does not represent a shared understanding of the applicability of the MFN clause. (The unilateral decree/bulletin of The Netherlands and France declare that the tax rate on dividends under their respective DTAAs with India stands modified under the MFN clause after India entered into a DTAA with Slovenia, which became a member of the OECD on 21st July 2010. The DTAA has a lower tax rate of 5% if the holding is above 10%. It has been further stated in the decree/bulletin that the lower rate will be applicable retrospectively from the date Slovenia became a member of the OECD).
3. To get the benefit of concessional rates under DTAAs, the benefit shall only be available after the date of entry in force with the third state, not from when it became a member of OECD.
4. As per the Indian Laws and also conferred by Hon’ble Supreme Court of India in Union of India Vs Azadi Bachaao Aandolan has observed that the DTAA provisions come into force on the date of issue of notification of such DTAA. Hon’ble Supreme Court also made it clear in the judgment that the beneficial provision of sub-section (2) of section 90 springs into operation once the notification is issued.
5. Import of concessional rates by invoking MFN Clause cannot be done selectively and the benefit of a lower rate or restricted scope of source taxation will available only when the conditions are satisfied:
i. The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State;
ii. The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it;
iii. India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and
iv. A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the First State, as required by the provisions of sub-section (1) of Section 90 of the Income Tax Act, 1961.
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