Recently, in a significant ruling of Nestle SA1, the Supreme Court of India had examined the interpretation of the Most Favoured Nation (MFN) clause in Indian treaties with OECD member countries.
One of the key principles held in the judgment was that the operation of MFN clause in the protocol to a tax treaty is not automatic. It also stressed upon the necessity of a mandatory notification2 by the Government of India for enforcing any protocol that alters the terms of tax treaty.
Taking this principle forward, recently Government of India vide Notification3 has conferred a lower tax rate at 10 percent under Article 13(2) of India-Spain Tax Treaty by triggering the MFN clause under India-Spain Tax Treaty.
In effect, income from royalty and Fees for Technical Services ('FTS') amongst India and Spain would be taxable at the lower tax rate of 10 percent on gross basis.
While the MFN clause to India-Spain Tax Treaty itself provide for the effective date from which the changes should come into force, however, as per the Notification, the lower rate of tax (10 percent) would be applicable prospectively from financial year 2023-24.
Interesting to note that though the MFN clause under the India-Spain Tax Treaty provides beneficial treatment with respect to both (i) lower tax rate; and (ii) restricted scope; with reference to royalty / FTS, the present Notification only provides benefit of lower rate of tax by importing the rate of tax (at 10 per cent) from India-Germany Tax Treaty.
Way forward:
Taxpayers of India or Spain earning income in the nature of FTS by providing services in either of the countries would be subject to a lower withholding tax of 10 percent instead of 20 percent as was earlier provided in India-Spain Tax Treaty.
Spanish taxpayers earning FTS or royalty income from India, for which tax is deducted at a rate higher than 10 percent in financial year 2023-24, can claim a refund of such excess TDS by filing tax return in India.
From Indian taxation perspective, it is advisable for the Indian taxpayers to maintain robust documentation while deducting TDS on royalty or FTS payments at lower tax rate of 10 percent under India-Spain Tax Treaty.
Further, with the amendments brought in by Indian Budget 2023, Spanish taxpayers earning royalty or FTS income from India and claiming benefit of lower tax rate of 10 percent under Tax Treaty, would be required to comply with tax filings in India.
Footnotes
1. [458 ITR 756]
2. Section 90(1) of the Income-tax Act, 1961
3. Notification No. 33 of 2024 dated 19 March 2024
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