ITAT rules against CBDT circular

ITAT rules against CBDT circular

The foreign company had claimed the benefit of a lower tax rate under the India-Portugal agreement

The Income Tax Appellate Tribunal (ITAT), Pune has held that the Central Board of Direct Taxes (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), transgressed the boundaries of the Income Tax Act, 1961.

The bench comprising members RS Sayal (Vice President) and Partha Sarathi Chaudhury (Judicial Member) ruled that since the circular was in the nature of an additional detrimental stipulation mandated for taking the benefit conferred by DTAA, it could have no retrospective effect.

The assessee, a foreign company incorporated in Spain, having declared an income in the nature of the 'fees for technical services' and 'royalty', claimed the benefit of a lower tax rate of 10 percent provided under the DTAA between India and Portugal. Though the DTAA between India and Spain taxes royalty and technical services fee at 20 percent, 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.

While not disputing the nature and amount of the income, the Assessing Officer (AO) refused to allow the benefit of the MFN clause. He said that a separate notification by the government was required to import it. Taxing the income under the IT Act at 10 percent plus surcharge and cess, he refused the benefit of a 10 percent tax rate available to the assessee. The latter challenged the order before the ITAT.

Opposing the contentions of the assessee and supporting its 2022 circular, the revenue department had claimed that the requirement of a separate notification issued by India, importing the benefits of a latter treaty into a treaty with another country, was in consonance with the requirements of the IT Act.

The Act provided the Central government the power to enter into agreements with foreign countries for avoidance of double taxation, granting tax relief, and making provisions for the implementation of such agreements. As per the Act, in the presence of such a DTAA, the provisions applied only to the extent that they were more beneficial to the assessee.

Thus, rejecting the contention of the revenue department, ITAT stated, "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 said that the circular transgressed the boundaries of the Act. Denying the circular a retrospective effect, the bench ruled that legislation attaching additional disability could not be retrospective without a clear legislative intent.

Partly allowing the appeal against the revenue department, the tribunal held that the CBDT circular could not be invoked against the assessee.