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1. CHALLENGING CBDT’S MFN CLAUSE CIRCULAR NO. 3 OF
2022 DATED 03.02.2022
AUTHOR :AMAN GUPTA
https://taxguru.in/income-tax/challenging-cbdts-mfn-clause-circular-no-3-2022-dated-03-02-2022.html
Recently, High Court of Delhi has accepted Writ Petition in the case of Societe De Participations Financieres
ET Industrielles Spafi (French Shareholder) vs. Assistant Commissioner of Income Tax & ANR. (W.P.
(C) 9316/2022 & CM APPLs. 27903-27904/2022) and has issued notice challenging CBDT’s MFN Circular
No. 3 of 2022 wherein it has been submitted by the assessee that CBDT has exceeded its jurisdiction by laying
down conditions for invocation of the MFN clause.
Understanding MFN Clause
India has entered into DTAA’s having an MFN clause with various countries. The Protocol to the DTAA’s with
said countries (‘relevant DTAA’) provide that if under any DTAA between India and a third State (‘subsequent
DTAA’), India limits its taxation to a lower rate or a more restricted scope than the rate or scope provided in the
relevant DTAA, the same rate or scope as is applicable in the subsequent DTAA shall also apply under the
relevant DTAA.
MFN clause is usually found in Protocols and Exchange of Notes to DTAAs. Once this clause is part of a treaty,
the residents of contracting states get equal treatment as is being given to resident of other (third) states.
The intention of MFN clause in tax treaties is:
granting of lower rate on specified income and/or;
restricting the scope of income and/or;
other benefit in terms of allowance of expenses in case of business income
MFN clause, as forming part of protocol, is an integral part of the tax treaty. Dr. Klaus Vogel in his Commentary
on Double Tax Conventions mentions-
“……As previously mentioned, (final) protocols and in some cases other completing documents are
frequently attached to treaties. Such documents elaborate and complete the text of a treaty, sometimes
even altering the text. Legally they are a part of the treaty, and their binding force is equal to that of the
principal treaty text. When applying a tax treaty, therefore, it is necessary carefully to examine these
additional documents”
A typical MFN clause in any Indian DTAA reads as under (reproduced from Protocol IV(2) of the India-
Netherlands treaty–
“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

2. 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.”
Thus, in view of the above, while examining the tax liability of Royalty / FTS under the relevant provisions of
the DTAA, it would also be critical to examine whether the DTAA has an MFN clause or not.
Conditions Stipulated in Circular No. 3/2022 and our comments
In the circular it has been clarified that the applicability of the MFN clause and benefit of the lower rate or
restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest
income, royalties, Fees for Technical Services, etc.) provided in India’s DTAA with the third states (OECD
Member) will be available to the treaty with an MFN clause (treaty with the first state) only when all the four
conditions are met. The conditions are being discussed here with respect to the act, DTAAs and the prior
judgments of the High Courts:
S. No. Condition Our comments
1.
is entered into after
The treaty with the third state The text of the above India-Netherlands treaty, explicitly mentions that the
the MFN clause shall be extended only if India enters into an agreement with
signature/ Entry into Force of (member of OECD) after signature of the India-Netherlands treaty.
the treaty with an MFN Hence, it seems that the CBDT clarification in this regard is likely to hold good
clause (treaty between India before the courts.
2.
into between India and
and the First State);
A plain reading of the above protocol doesn’t seem to suggest that the third stat
member of the OECD at the time that the treaty between it and India is signed
the time of applicability of the MFN clause.
Further, the High Court of Delhi in Concentrix Services Netherlands B.V. v
Officer (TDS) P.(C) NOS. 9051 OF 2020 AND 882 OF 2021 AND CM APP
The second treaty is entered OF 2021 APRIL 22, 2021 had held that the principle of common interpretati
a applied in the interpretation of DTAAs. Further, reliance was placed by th
State which is a member of interpretation of the other contracting State, i.e., the Netherlands which ha
the OECD at the time
signing the treaty with it;
of clause IV (2) to hold that “the lower rate of tax set forth in the
Convention/DTAA will be applicable on the date when Slovenia became a
OECD, i.e., from 21-8-2010, although, the Convention/ DTAA between India
came into force on 17-2-2005.” (emphasis supplied)
The plain reading of the protocol and more so, the judgment of the Delhi HC s
the issue squarely and in view of the same, the clarification from CBDT is
withstand, if challenged.

3. 3.
India limits its taxing rights
in the second treaty
taxation in respect of
relevant items of income;
and
in This condition will, in any case, be a pre-requisite for the import of MFN claus
relation to rate or scope of and availing the benefit of the same. Hence, it is unlikely to be contested a
the doesn’t require in-depth interpretation/analysis.
4.
A separate notification
been issued by
the treaty with MFN clause.
The text of the protocol and the provisions of section 90(1) of the Income-t
contain no explicit mention of the requirement of a separate notification for
benefits of the MFN clause.
In Steria (India) Ltd. vs. CIT, [2016] 386 ITR 390 (Del) the High Court of D
“protocols and in some cases other completing documents are frequently
has treaties…Legally they are part of the treaty, and their binding force is equal
India, principal treaty text. When applying a tax treaty, therefore, it is necessary
importing the benefits of the examine these additional documents. Therefore, the conclusion of the AAR th
treaty with the third state into the Protocol, which forms part of the DTAA between India and Fran
automatically become applicable and that there has to be a separate
incorporating the beneficial provisions of the DTAA between India and U
part of the India- France DTAA is not agreeable.” (emphasis supplied)
In view of the provisions of section 90 and the above judgement of the Delhi
that this condition might not be acceptable before the adjudicating authorities.

4. Issues regarding applicability of MFN are being litigated at various judicial levels. As a Circular is binding on
tax authorities and not necessarily on taxpayers and therefore it has been clarified in circular that in the case of a
taxpayer there is any decision by any court on this issue favourable to such taxpayer, then the circular will not
affect the implementation of the court order in such case.
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