TaxTMI 
TaxTMI 
2026 (9) TMI 1251
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....Hon'ble Dispute Resolution Panel ('DRP') have erred in holding that interest income received under Section 244A of the Act of INR 1,66,05,370 is taxable at the rate of 10 percent as per Article 11 of India-Netherland Double Taxation Avoidance Agreement ('DTAA'), without appreciating the fact that on application of the beneficial provisions of Article 12 of India-Italy DTAA read with Protocol IV of India-Netherland DTAA containing the Most Favored Nation ('MFN') clause, the said income is taxable at 'Nil' rate. 2. That on the facts and circumstances of the case and in law, the Ld. AO and DRP have erred in stating that only provisions of tax treaty with Germany, Sweden, Switzerland and United States of America will be imposed under the MFN clause contained in India-Netherland tax treaty, and India-Italy tax treaty is excluded from the preview of such MFN clause of India-Netherland tax treaty. 3. The Ld. AO and DRP have erred in both facts and in law by not following binding jurisprudence, wherein after considering the facts, it was held that protocol to DTAA forms integral part of conventions, and no separate notification will be ....
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....onsidered necessary either before or during the appellate proceedings." 4. Brief facts of the case are that the assessee was incorporated in Netherlands and provide electronic global distribution services in the 'rest of the world' territory (including the Indian region) for the travel industry, utilizing the Computer Reservation System ('CRS'), an automated system which processes booking and other data, till 31st Dec, 2016. The present assessee currently has no business operation in India and all the business of providing global distribution services in the Indian region was assumed by its successor entity, Travelport International Operations Ltd. ('TIOL'), w.e.f 1st Jan, 2016. 5. For AY 2015-16, a refund of INR 8,04,72,190 (including interest u/s 244A of the Act amounting to INR 1,66,05,368 was determined by the preceding Assessing Officer ('Ld.AO') vide order dated 02 July 2019 passed u/s 154/143(3) of the Act. Consequently, a refund amounting to INR 73,493,950 was credited in the account of the Assessee on 22 November 2019 after deduction of tax at source ('TDS') amounting to INR 69,78,240 (at the rate of 42.024%) on interest component of the refund. Subse....
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....reaty & Protocol - 13.07.1988 21.01.1989 27.03.1989 13.08.1999 01.04.1997 or 01.04.1991 Or 01.04.1998 Or 01.04.1995 (based on the provision, in relation to the concerned contry) 30.08.1999 Yes (13 November 1961) USA (earlier agreement dated 15.06.1989; also see instruction Dated 28.04.2003 and 23.10.2007) Treaty & Protocol : 12.09.1989 18.12.1990 20.12.1990 No amendment [Note - USA does not have an MFN Clause] NA NA Tes (12) November 1961) The decision also noted with regards the date of signing relevant amending protocol i.e. 13.08.1999 that "13/30.08.1999 (date of signing mentioned as 13.08.1999 in Protocol, but as 30.08.1988 in amending notification dated 30.08.1999)." b. The Hon'ble Supreme Court in its decision interpreted the MFN Clause in the India-Netherlands DTAA, India - Switzerland DTAA and the India- France DTAA and the India-Spain DTAA. It is pertinent to note that the Hon'ble Supreme Court in its decision did not interpret the India- Netherlands DTAA qua Article 11 which pertains to taxation of interest. c. The findings of the Hon'ble Court regarding treaty practice of India, in relation ....
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....n 26.10.1996 (India-Germany); the DTAA between India and Sweden entered into force on 25.12.1997, the India-Swiss Confederation DTAA entered into force on 19.10.1994 itself. These earlier dates, did not result in India automatically extending benefits 55. of Article IV of the India-Netherlands DTAA Protocol to Netherlands. The relevant phrase in that provision (Article IV) obliged India to grant to the Netherlands, the same benefit to it, as was granted to the other nation in that third party state's DTAA or Protocol with India: "as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also, apply under this Convention" 55. Clearly, therefore, so far as India-Netherlands DTAA goes, there is established and clear precedent, of behaviour, in relation to treaty practise and interpretation. This was uncontested, and is a matter of record. (emphasis supplied) III. The relevant extract of the amending Notification No. SO 693(E), dated 30.08.1999 to the India Netherlands DTAA is as under (p. 119 of the Paperbook)....
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.... at source on dividends, interest, royalties, fees for technical services and payments for the use of equipment to a rate lower or a scope more restricted than that provided in the Convention between India and the Netherlands on the said items of income; NOW, THEREFORE, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Convention notified by the said notification which are necessary for implementing the aforesaid Convention between India and the Netherlands, namely: 1. With effect from April 1, 1997, for the existing paragraph 2 of article 10 relating to dividends, the following paragraph shall be read: "2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends." II. With effect from April 1, 1997, for the existing paragraph 2 of article 11 relating to interest, ....
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.... b) with respect to loans or credits extended or endorsed i. by the Export Import Bank of the United States, when India is the first-mentioned Contracting State; and ii. by the EXIM Bank of India, when the United States is the first-mentioned Contracting State, and c) to the extent approved by the Government of that State, and derived and beneficially owned by any person, other than a person referred to in subparagraphs (a) and (b), who is a resident of the other Contracting State, provided that the transaction giving rise to the debt-claim has been approved in this behalf by the Government of the first-mentioned Contracting State; shall be exempt from tax in the first-mentioned Contracting State." (emphasis supplied) b. As per Article 11 (3) of the India-US DTAA interest payable on refund of income tax under the Act by the Government of India to a person covered by the India-US DTAA will be exempt from tax since Interest on refunds payable under the Act is an interest on a debt claim which is approved by the Government of India. Reliance in this regard is placed on the decision of the Hon'ble Madras High Court in Ansaldo Energia S....
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....hich ought not to have been denied and cannot be precluded from being applicable in the Assessee's case on the basis that the same has not been explicitly sought. V. That in the present facts the Ld. AO at para 5.5. of the Assessment Order (p.12 of the Appeal Paperbook / p. 30 pf the Paperbook) also has accepted that the only certain portions of the India-US DTAA (which as per the protocol also includes interest) have been imposed under the MFN clause. In such a scenario considering Article 11 of the India-US DTAA and the protocol of the India-Netherlands DTAA the Assessee's income ought to be held to be taxed at NIL rate. Furthermore, International Law also requires that entire MFN clause be given effect to in its entirety. VI. Thus, it is submitted that the obligation in Article IV(2) of the Protocol is, on its own terms, an obligation of substantive parity. The clause does not speak merely of a lower "rate"; it equally imports a "scope more restricted", and provides that "the same rate or scope" as in the comparator convention "shall also apply". The exemption in Article 11(3)(c) of the India-US DTAA is, in substance, a restriction on the scope of sourc....
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....9. X. Article 11(3)(c) of the India-US DTAA exempts from source taxation interest beneficially owned by a resident of the other Contracting State where "the transaction giving rise to the debt-claim has been approved in this behalf by the Government" of the source State. By Article IV(2) of the Protocol to the India-Netherlands DTAA, where India has, in a convention with a third OECD State, limited its source taxation of interest to "a rate lower or a scope more restricted," the same rate or scope "shall also apply" under the India-Netherlands DTAA. That benefit was given effect by Notification S.O. 693(E) dated 30.08.1999, issued under Section 90 of the Act, which expressly gives effect to Article IV of the said Protocol vis-à-vis the India-US DTAA. XI. Thus, the following is submitted that in the present facts, a. first, that the income in question is interest on a refund under Section 244A of the Act. It stands settled by the Hon'ble Madras High Court in Ansaldo Energia SpA (supra), following the Hon'ble Supreme Court in Union of India v. Tata Chemicals Ltd., that a refund and the interest payable thereon are debt claims, the refund bein....
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....e application dt. 12.03.2026- (i) By virtue of MFN clause under India Netherland DTAA r.w. Hon'ble SC decision in Nestle SA (2023) and Beneficial provision of Article 11(3)(c) of India US DTAA, the interest income is not taxable. (ii) Interest on income tax refund has been taxed @ 10% as per India Netherland DTAA without appreciating carry forward losses of the assessee against it. III. The assessee is a foreign company incorporated in Netherlands. A refund of Rs. 8,04,72,190/-, including interest of Rs. 1,66,05,368/- u/s 244A, was determined in case of the assessee for AY 2015-16, correspondingly, refund of Rs. 7,34,93,950/- was credited in account of the assessee on 22.11.2019 after deduction of TDS of Rs. 69,78,240/- on the interest income. The said interest income was offered to tax at 10% under the India-Netherlands DTAA by the assessee. Assessee in its submission dated 28.01.2022 has claimed that the entire interest income is not taxable as per restricted scope under India Netherland DTAA r.w. India-Italy DTAA in with respect to MFN clause. Thus, Assessee has revised its refund claim from Rs. 53,17,703/- to Rs. 69,78,240/-. IV. First the relevant d....
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....therland DTAA VI. The protocol, which is an integral part of DTAA, referred to by assessee in its submissions is quoted below: "Ad Articles 10, 11 and 12 1. Where tax has been levied at source in excess of the amount of tax chargeable under the provisions of Article 10, 11 or 12, applications for the refund of the excess amount of tax have to be lodged with the competent authority of the State having levied the tax, within a period of three years after the expiration of the calendar year in which the tax has been levied. 2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention."....
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....d scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA. after following the due procedure under the Indian tax law. From a plain reading of the aforesaid circular, it is clear that only if all the conditions enumerated in Paragraph 5(i) to (iv) are satisfied, then the lower rate or restricted scope in the treaty with the third State can be imported into the treaty with an OECD state having MFN clause in the DTAA. In the instant case condition no. (iv) is not satisfied as no such notification has been issued by the Indian government in context of MFN clause in India Netherland DTAA, on the contrary, Indian government has objected to decree of government of Netherland for unilateral use of MFN clause for lowering tax rates. Not only the fact that there is no notification in terms of the aforesaid circular, but also the fact that Indian government has written to the Netherland government on the very same issue of MFN under consideration in this case, clearly brings about stand of the government. Though India Netherland DTAA has MFN clauses built into their original....
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....to force on October 26. 1996, the Convention between India and Sweden which entered into force on December 25, 1997, the Convention between India and the Swiss Confederation which entered into force on October 19, 1994, and the Convention between India and the United States of America which entered into force on December 18, 1990, which states are members of the Organisation for Economic Co-operation and Development, the Government of India, has limited the taxation at source on dividends, interest, royalties, fees for technical services and payments for the use of equipment to a rate lower or a scope more restricted than that provided in the Convention between India and the Netherlands on the said items of income; Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Convention notified by the said notification which are necessary for implementing the aforesaid Convention between India and the Netherlands, namely: .....II. With effect from April 1, 1997, for the existing paragraph 2 of article 11 relating to interest th....
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....tion Avoidance Agreements (DTAAs) are not automatically enforceable. Tax Act to claim these lower tax rates. Supreme Court while ruling firmly in favour of the Revenue has set able. Taxpayers must obtain a formal notification under Section 90 of the Income forth following legal precedents: 1. No Automatic Application: An MFN clause does not automatically entitle taxpayers to the benefits of a treaty India signed with a third country later on. 2. Mandatory Notification: Issuing a notification under Section 90 of the Income Tax Act is an absolute prerequisite to grant any benefits derived from a protocol or altered DTAA. 3. Internal vs. External Treaties: While international treaties bind India externally, they do not confer rights upon taxpayers domestically until formally assimilated into Indian municipal law. Each DTAA is unique X. It is brought to notice that every word of the DTAAs signed by India with every other country is scrutinized, deliberated and discussed for long periods of time before it is signed. There are numerous back and forth letters written leading to a final position on which both the countries agreed. Every word in the DTAAs of....
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....tandable that assessee being a resident of Netherland, wishes to take benefit of NIL tax on interest as is in the case of DTAAs of Italy and US, however since the clause related to such a benefit is missing in the India Netherland DTAA and also because there is no notification making it possible for Netherland to take advantage of the MFN clause, it is not possible to grant assessee this benefit. XII. After the Protocol to the India-Netherlands DTAA was signed on 30th July 1988, the Central Government of India notified various modifications pursuant to the MFN clause. Such modifications were notified in accordance with Section 90 of the Income-tax Act, 1961 and came into effect April 1, 1997 onwards. The modifications originated from India's DTAAs with certain OECD member nations. The relevant portion of the notification is reproduced below: "AND WHEREAS in the Convention between India and Germany which entered into force on October 26, 1996, the Convention between India and Sweden which entered into force on December 25, 1997, the Convention between India and the Swiss Confederation which entered into force on October 19, 1994, and the Convention between India and ....
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.... It is reiterated that this is an additional claim which was not there in the return of income and has been claimed for the first instance before the Hon'ble ITAT and hence reliance is placed on the decision of Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 (SC). Additionally, there is no provision that directly authorizes a taxpayer to apply interest income tax rate from India-USA DTAA as such, in place of rate in India Netherlands DTAA. The notification only uses India-USA DTAA (along with the treaties with Germany, Sweden, and Switzerland) as a benchmark to amend and update Article 11 (Interest) of the India-Netherlands DTAA. After such amendment, applicable rate is one as amended in India Netherlands DAA itself, not the standalone rate from India-USA DTAA. Therefore, the Assessee's contention that interest provisions of India USA DAA should directly apply to India-Netherlands DTAA under MFN clause and the notification is not sustainable. 3. Set off of carried forward of loss against Interest Income Brought-forward business losses can be set off only against "Profits and Gains of Business or Profession" and Interest Income under Section 244A is taxable u....
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....;s DTAA or Protocol with India: "as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also. apply under this Convention" 55. Clearly, therefore, so far as India-Netherlands DTAA goes, there is established and clear precedent, of behaviour, in relation to treaty practise and interpretation. This was uncontested, and is a matter of record." (emphasis supplied) 2. It evident from a reading of the said paragraph that, far from supporting the proposition canvassed by the Revenue, the said paragraph in fact reinforces the Assessee's submission. The Hon'ble Supreme Court specifically noticed that under Article IV of the Protocol to the India-Netherlands DTAA, where India agreed to a lower rate of tax or a more restricted scope of taxation in a convention with another State, "the same rate or scope as provided for in that convention or agreement" would apply under the India-Netherlands DTAA. Thus, the Protocol itself identifies the third-country convention as the source from which the relevant benefit is to be deri....
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.... in accordance with the provisions of such treaty. The Government is obliged to implement the agreement entered into with other states by virtue of Article 51(c) of the Constitution. 5. That principles of customary law are enshrined in Articles 26, 27 and 31 of the Vienna Convention on the Law of Treaties, 1969 ('VCLT) 'i.e. Pacta Sunt Servanda' or 'Good Faith Principle' in Article 26 of the VCLT, viz., is that "Every treaty in force is binding upon and parties to it and must be performed by them in good faith." Article 27 of VCLT further strengthens the aforesaid principle by providing that "no party to a treaty might attempt to justify its failure to perform any of its international treaty obligations by invocation of its municipal law." Article 31, 'General Rule of Interpretation', of the Convention too provides that a "treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose". The Hon'ble Supreme Court of India in Ram Jethmalani vs. Union of India (2011) 8 SCC 1' while referring to the VCLT held the following: ....
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....ts following wording: "IV. 2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention." (emphasis supplied) 9. The clear wordings of the protocol as read with paragraph 54 of the Nestle SA (supra) decision of the Hon'ble Supreme Court clearly mandate that the full benefit of Article 11 of the India -US DTAA be granted. 10. Furthermore, as mandated by the Constitution of India each and every word of the protocol to the India-Netherlands DTAA has to be given effect to as per Article 51 (1) (c) and Article 73 of the Constitution of India. 11. Article 73 of the Constituti....
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....s DTAA cannot be interpreted in a manner so as to deny persons covered under the DTAA the beneficial provisions of the India-US DTAA. The application of the self-operating clause of the Protocol read with the Notification dated 30.08.1999 cannot be precluded from application by a narrow interpretation of the revenue. The benefit of the India - US DTAA cannot be denied under Section 90 of the Act 13. A bare perusal of Section 90 of the Act would show that it is the "Agreement", i.e. DTAA (and bilaterally agreed amendments to such "Agreement") between India and a foreign country which is required to be notified under Section 90. In present case, it is undisputed and admitted even in Nestle decision (supra) that India-Netherlands Treaty along with its Protocol which contains the most favored nation (MFN) clause in question already stands notified vide Notification No. GSR 382 (E) which clearly states that "the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India." and also states that the Protocol which contains the MFN clause "shall form an integral part of the Convention" i.e. DTAA ....
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....SCC 863, by Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh AIR 1949 PC 14 besides multiple other decisions. 19. In the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. Commissioner of Income-tax, [2021] 432 ITR 471 (SC) (para 159)15, the Hon'ble Supreme Court had observed that the VCLT is relevant for Indian treaty interpretation even though India is not a signatory, and thus reaffirmed the good-faith principle for treaty interpretation in India. It was also observed it is settled law in India that treaty interpretation that is not in accordance with the VCLT is incorrect. Denying the benefit of the MFN Clause basis the contention of the department is against spirit of good-faith interpretation of the MFN clause. 20. A good-faith interpretation under Article 31 of the VCLT requires that the MFN clause be given effective operation in the light of its object and purpose, and forbids a construction that renders the substantive commitment illusory. It is pertinent that the very expert whose opinion was placed before the Hon'ble Supreme Court in Nestle SA (supra)" ie. Prof. Dr. Stef van Weeghel, has since, in 2025, analysed this Prot....
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....recisely the distinction from any reliance on the India-Italy DTAA: the notification condition that the Revenue contends is unmet is, on the India-US route, demonstrably met. The only question remaining is one of interpreting that notification harmoniously with the "or scope" limb of the clause it implements, as submitted above. 23. In any event, a circular issued under the Act cannot curtail a benefit otherwise available under a notified Convention, nor be read so as to defeat the very treaty obligation it purports to administer, a circular operates within, and not above, the statute and the Convention. Conclusion 24. MFN treatment "derives exclusively through the act of concluding a treaty that contains an MFN treatment clause" and constitutes "the quintessence of a treaty-based guarantee". The right originates in the basic treaty containing the MFN clause, whilst the coraparator treaty merely supplies the favourable treatment that must be extended to the beneficiary State.19 The purpose of MFN clauses is to establish and maintain equality of treatment amongst treaty partners and to ensure that one treaty partner is not placed in a less favourable posit....
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.... was issued to implement." 11. We have heard the rival submission and have carefully perused the materials on record. The sole and substantive issue for our adjudication is whether interest income of INR 1,66,05,368/- received by the Assessee under Section 244A of the Act is exempt / taxable at a 'Nil' rate under the Most Favoured Nation ('MFN') clause in Protocol IV of the India-Netherlands Double Taxation Avoidance Agreement ('DTAA') read with Article 11(3)(c) of the India-USA DTAA (or Article 12 of the India-Italy DTAA), or whether it is taxable at 10% under Article 11(2) of the India-Netherlands DTAA. 12. To summarise, the Assessee, referring to the Protocol IV MFN Clause of the India-Netherlands DTAA, contends that it obligates India to extend any lower tax rate or more restricted scope granted on interest to another OECD member state. Further the assessee imports the US DTAA Benefits under Article 11(3)(c) of the India-USA DTAA, to assert that interest derived from debt-claims mandated/approved by the Government (such as Section 244A refund interest, as affirmed in Ansaldo Energia SPA (supra) is exempt from source taxation ('Nil' rate). T....
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....ally notified into Indian municipal law. We are of the considered view that scope and effect of Notification No. S.O. 693(E) dated 30.08.1999 is limited only to extending explicitly to amend paragraph 2 of Article 11 of the India-Netherlands DTAA to reduce the interest tax rate from 15% to 10%. While the preamble to the notification acknowledges that India had granted concessions to OECD countries (including the USA), the Contracting States, India and Netherland, consciously limited their negotiated agreement to a 10% gross withholding tax for beneficial owners. 15. The Assessee attempts to bypass the Nestle SA barrier by arguing that Notification No. S.O. 693(E), issued on August 30, 1999, already acts as the required Section 90 notification for importing the beneficial 'Nil' rate from the India-US DTAA, is not convincing. A plain reading of that notification shows a different, deliberate agreement to explicitly lower the tax on interest from 15% to 10% for beneficial owners. While the notification acknowledges that India had restricted the scope of taxation on interest with other OECD members (like the USA and Switzerland), India and the Netherlands specifically agreed....