H P Agrawal: Tax treaty protocol binding

FOREIGN ENTERPRISES

The Income Tax Act empowers the central government to enter into agreements with the government of other countries to grant relief in respect of income, which is subjected to tax in both the countries. Such agreements are called double-taxation avoidance agreements, shortly referred to as tax treaty.

In several cases a protocol is annexed to the tax treaty, which is also an indispensable part of the treaty with the same binding force as the main treaty itself.

As held in the Deputy Commissioner of Income Tax vs ITC Ltd case, 82 ITD 239, the protocol is an integral part of the tax treaty and its binding force is equal to that of the principal tax treaty. The provisions of any tax treaty therefore, should be read with the protocol clauses because the treaty will be subject to the provisions contained in the protocol.

In several cases the protocol provides that if India subsequently signs a tax treaty with a third state, which is a member of the OECD, and limits its taxation to a rate lower or a scope more restricted than the rate or scope provided for in the particular tax treaty, the same rate or scope as provided for in the subsequent tax treaty shall also apply under the tax treaty concerned.

For example in the protocol annexed to the tax treaty with Sweden, the clause reads: "In respect of Articles 10 (dividends), 11 (interest) and 12 (royalties and fees for technical services), if under any convention, agreement or protocol between India and a third state, which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this convention. Agreement or protocol on the said items of income shall also apply under this convention."

This proposition can also be illustrated by taking another example of the Indo-France tax treaty. The protocol of the Indo-France tax treaty contains a clause that scope of the expression "fees for technical services" as contained in the treaty cannot be wider than the scope of most restrictive tax treaties that India has signed with any OECD member after September 1, 1989.

India has entered several tax treaties after September 1, 1989 where "fees for technical services", unlike the Indo-France treaty, does not include the fees received for services that are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of a property.

Therefore, in a recent case reported in 82 ITD 239 the tribunal held that "the same scope of 'fees for technical services' as provided for in the tax treaties with the UK, the US and Switzerland, which is far more restricted vis-a-vis the scope of this expression in the Indo-French tax treaty, shall also apply under the Indo French tax treaty, with effect from the date on which the Indo-French tax treaty or such other tax treaties enters into force, whichever enters into force later."

Similarly, in another case reported in 87 ITD 653, the restricted definition of "fees for included services" as defined in the Indo-US tax treaty has been held applicable in case of the tax treaty between India and the UK. It is therefore felt that tax treaties require a careful interpretation. A reference to subsequent tax treaties may at times become useful while interpreting terms like "royalty" or "fees for technical services".

agar@nda.vsnl.net.in