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Direct Tax Alert - Separate Notification not required for applying MFN clause

22 February 2022


The Double Tax Avoidance Agreement (DTAA) entered by India and certain countries contain Most Favoured Nation (MFN) clause. As per the said clause, if India enters into a DTAA on a later date with a third Country which is an OECD member country, providing a beneficial rate of tax or restrictive scope for taxation, a similar benefit will be available to the first country. However, availing benefit of this clause is not free from litigation. With a view to clarify MFN clause’s applicability, the Central Board of Direct Taxes (CBDT) issued a circular1 (please click here to read our analysis of the Circular). This circular laid down four conditions that need to be satisfied for exercising the MFN clause. One of these conditions requires issuance of a separate Notification by India importing the benefits of the second DTAA into the DTAA with the First Country. This condition has created confusion among taxpayers as all existing DTAAs could be impacted. There may be situations where for a taxpayer all other 3 conditions are satisfied but conditions mentioned above is not satisfied, and taxpayer may lose DTAA benefit. In this regard, recently, the Pune Income Tax Appellate Tribunal (ITAT)2 had an occasion to examine the said circular while dealing with the MFN clause of India-Spain DTAA. We, at BDO in India, have summarised this ruling and provided our comments hereunder:


The taxpayer is a Company incorporated in Spain. During the year, it received payment towards provision of technical and financial support services as well as SAP software and implementation of process model from an Indian concern. The taxpayer treated these receipts as fees for technical services and royalties respectively and accordingly claimed the benefit of Article 13 of India-Spain DTAA. Relying on the Protocol to India-Spain DTAA having MFN clause along with Article 12 of DTAA between India and Portugal (Portuguese DTAA), the taxpayer claimed that these receipts were taxable at 10% instead of 20% as provided in the India-Spain DTAA. While the Tax Officer did not dispute the amount or the nature of income offered by the taxpayer, it observed that the tax rate of 10% under the Portuguese DTAA could not be applied because section 90(1) of the Income-tax Act, 1961 (IT Act) specifically requires issuance of necessary Notification by the Government of India. The Tax Officer further observed that in order to import an MFN clause from another DTAA having a lower rate of tax or narrower scope of definition of certain clause, it is necessary that importing of such a clause must be notified. Accordingly, in the absence of any notification of MFN clause, the Tax Officer denied the benefit of lower rate of taxability under India-Portuguese DTAA and applied the rate of 10% (plus surcharge and education cess) as per the provisions of the IT Act being more beneficial than provisions of India-Spain DTAA. Apart from this, the Tax Officer disallowed certain reimbursement of expenses. The Dispute Resolution Panel did not grant any succour and hence the Taxpayer file an appeal before the Pune Tax Tribunal (Tax Tribunal).


While permitting the access of India-Portuguese DTAA through the MFN Clause of India-Spain DTAA and thereby applying 10% tax rate, the Tax Tribunal made following observations:

  • The taxpayer is a resident of Spain, and the India-Spain DTAA was notified in 1995.
  • The MFN clause contained in the Protocol manifests that if India has entered into a Convention after 1 January 1990 with a third country which is a Member of the OECD and under such Convention it has, inter alia, agreed for a lower rate of taxation vis-à-vis that provided in the DTAA with Spain, such lower rate of tax will apply under the DTAA with Spain.
  • India entered into a DTAA with Portuguese Republic (an OECD Member country) vide Notification dated 16 June 2000. Article 12 of India-Portuguese DTAA, provides that the ‘royalties’ and ‘fees for technical services’ shall, in the circumstances as are obtaining in the extant case, be taxed at 10 percent of the gross amount.
  • India-Spain DTAA was signed by both the countries on 8 February 1993, which entered into force on 12 January 1995 and was notified on 21 April 1995. The Protocol was also signed on the same date i.e., 8 February 1993.
  • It is overt from the opening part of the Protocol, duly signed by competent authorities of both the countries along with and on the same date on which the main DTAA or Convention was signed, that Protocol has been treated as “an integral part of the Convention”. Once the DTAA between India and Spain was notified on 21 April 1995, the Protocol, which is an integral part of DTAA, also got automatically notified along with DTAA.

           Re. Circular 3/2022

  • The CBDT in para 5 of the Circular No. 3/2022 has provided that the benefit of lower rate and the restricted scope under the MFN clause will be extended only when all the four conditions specified in the circular is satisfied.  While first three conditions are satisfied, the fourth condition requires issuance of separate notification. Thus, it becomes ostensible that CBDT has mandated issuance of a separate notification for importing the benefits of a treaty with second State into the treaty with the first State by relying on Section 90(1) of the IT Act.
  • What is amply borne out from the language of section 90(1) of the IT Act is that a notification may be made for implementing the agreement that the Central Government has entered into with the Government of any country outside India for granting the relief. Reference to the expression ‘make such provisions as may be necessary’ for the purpose of the notification in the Official Gazette, is to adopt the manner of notifying as may be necessary for implementing the agreement and not that the notification is to be issued piecemeal and in a truncated manner. On notifying the Agreement or Convention, all its integral parts, get automatically notified. As such, there remains no need to again notify the individual limbs of the DTAA so as to make them operational one by one.
  • A circular issued by CBDT is binding on the Tax Officer and not on the taxpayer or Tribunal or other appellate authorities.
  • The CBDT has panned out a fresh requirement of separate notifications to be issued for India importing the benefits of the DTAA from the second State to the DTAA with the first State by virtue of its Circular, relying on such requirement as supposedly contained in section 90(1) of the IT Act. This requirement cannot primarily be applied to the period prior to the date of its issuance as it is in the nature of an additional detrimental stipulation mandated for taking benefit conferred by DTAA. Hence, it has to be applied prospectively.


The Tax Tribunal has made an important observation that a Protocol is an integral part of the DTAA and that once the DTAA is notified, all the integral parts get automatically notified. Hence, there is no requirement of issuing separate or piecemeal notifications. While India is yet to notify any DTAA for the purpose of the MFN clause, this observation will come as a relief to taxpayers who are currently claiming the benefit of MFN Clause. It is also imperative to note that the Circular is not binding on the taxpayer and hence the taxpayer can challenge the same before the higher forum. However, a detailed analysis based on its factual matrix should be carried out before applying MFN clause.


CBDT Circular No.3/2022 dated 03-02-2022

2 GRI Renewables Industries S.L.