CBDT Circular Denying Tax Benefit Under MFN Clause Transgresses Income Tax Act, Rules ITAT

The Assessee, a foreign company incorporated in Spain, having declared income in the nature of 'fees for technical services' and 'royalty', claimed the benefit of a lower tax rate of 10% provided under the DTAA between India and Portugal. Though the DTAA between India and Spain taxes royalty and technical services fee at 20%, the MFN clause under the Protocol to the India- Spain DTAA provides for extending the similar benefit of a lower tax rate given by India to a third country under an Agreement. The Assessing Officer (AO), not disputing the nature and amount of income, refused to allow the benefit of the MFN clause, holding that a separate Government Notification was required to import it. The AO, taxing the income under section 115A at 10% plus surcharge and cess as against 20% under the India - Spain DTAA, in view of section 90 (2) of the Act, refused the benefit of a 10% tax rate available to the Assessee under the MFN clause of the Protocol. The Assessee challenged the order of the AO before the Pune Bench of ITAT.

The Revenue Department, opposing the contentions of the Assessee, and in support of its 2022 Circular, claimed that the requirement of a separate notification issued by India, importing the benefits of a latter Treaty into a Treaty with another country, is in consonance with the requirements of section 90(1) of the Act.

Section 90 (1) of the Act provides the Central Government the power to enter into Agreements with foreign countries for avoidance of double taxation, granting tax relief, and make provisions for implementation of such Agreements. As per section 90 (2) of the Act, in the presence of such a DTAA, the provisions of the Income Tax Act apply only to the extent they are more beneficial to the assessee.

Rejecting the contention of the Revenue Department, the Bench held that section 90(1) only provides for the mode of notifying an Agreement by a Gazetted Notification. On notifying an Agreement, the Bench held, all its integral parts get automatically notified. Holding that a notification cannot be piecemeal or truncated and that the Protocol containing the MFN clause is an integral part of the India-Spain DTAA, the Bench ruled that the Protocol with its MFN clause was duly notified when the India-Spain DTAA was notified under section 90 (1) in 1995.

"Once the Agreement between India and Spain was notified on 21-04-1995, the Protocol, which is an integral part of the Agreement, also got automatically notified along with the Agreement. In such a scenario, it is difficult to comprehend the need for any separate notification for the import of the MFN clause."

Observing that a CBDT Circular was not binding on the Tribunal or the Assessee, it held that the Circular transgressed the boundaries of section 90 (1) of the Act. Denying the Circular a retrospective effect, the Bench ruled that a legislation attaching additional disability cannot be retrospective without a clear legislative intent.

Partly allowing the appeal against Revenue Department, the Tribunal held that the CBDT Circular, devoid of retrospective effect, requiring a separate notification for implementation of the MFN clause, could not be invoked against the Assessee.

Case Title: GRI Renewable Industries S.L. Vs. ACIT (IT), Circle-1, Pune