Treaty protocol and MFN clause can import a lower withholding rate; reimbursement needs factual verification for gross-tax treatment.

The treaty protocol to the India-Spain convention was treated as part of the notified agreement, so the Most Favoured Nation clause could import the lower 10% source-tax rate from the later India-Portugal treaty without a separate notification. A CBDT circular could not override the treaty text or deny that benefit retrospectively. On reimbursement, amounts forming part of consideration for royalty or fees for technical services taxed on a gross basis must be included in the taxable base, but the factual nature of the sum required verification, so the matter was sent back for fresh examination. TDS credit was to be verified and allowed in accordance with law.

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Issues: (i) Whether the assessee was entitled to apply the reduced 10% rate of tax under the India-Portugal treaty through the Most Favoured Nation clause in the India-Spain treaty protocol, instead of the 20% rate under the India-Spain treaty and section 115A; (ii) whether the amount claimed as reimbursement formed part of the gross receipts liable to tax on a gross basis; (iii) whether TDS credit had to be granted.

Issue (i): Whether the assessee was entitled to apply the reduced 10% rate of tax under the India-Portugal treaty through the Most Favoured Nation clause in the India-Spain treaty protocol, instead of the 20% rate under the India-Spain treaty and section 115A.

Analysis: The protocol to the India-Spain treaty was held to be an integral part of the convention and, once the treaty itself was notified, the protocol stood notified as well. The MFN clause in the protocol was therefore operative without requiring a separate notification for importing the lower source-tax rate from the later treaty with Portugal. A circular issued by the CBDT could not override the plain language of section 90(1) or operate retrospectively to deny the treaty benefit for the year under consideration.

Conclusion: The reduced 10% treaty rate was held applicable and the assessee succeeded on this issue.

Issue (ii): Whether the amount claimed as reimbursement formed part of the gross receipts liable to tax on a gross basis.

Analysis: In a regime where royalty and fees for technical services are taxed on gross receipts at a concessional rate, any amount forming part of the consideration for earning that revenue must be included in the tax base, even if described as reimbursement. At the same time, the factual record was insufficient to determine whether the sum was a true reimbursement unrelated to the taxable services or was embedded in the service consideration. The matter therefore required factual verification by the assessing authority.

Conclusion: The issue was remitted to the assessing authority for fresh adjudication, with opportunity of hearing to the assessee.

Issue (iii): Whether TDS credit had to be granted.

Analysis: The claim required verification of the tax deducted at source reflected in the records and corresponding credit was to be allowed in accordance with law.

Conclusion: The assessing authority was directed to verify and allow the TDS credit as per law.

Final Conclusion: The assessee obtained relief on the treaty-rate question and partial procedural relief on TDS credit, while the reimbursement issue was restored for fresh examination, resulting in a composite partial allowance of the appeal.

Ratio Decidendi: Where a tax treaty protocol is expressly made an integral part of the convention and the convention is duly notified, the protocol benefit does not require a separate notification for implementation; however, receipts taxed on a gross basis at a concessional rate must be included in the gross base if they form part of the consideration for the taxable services, subject to factual verification.

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