The Central Board of Direct Taxes vide Circular 3rd February, 2022 has issued a Clarification regarding the Most-Favoured-Nation (MFN) clause in the Protocol to India’s DTAAs with certain countries. It is hereby 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 DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met:
(i) The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language ofthe MFN clause) of the treaty between India and the first State;
(ii) The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it;
(iii) India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and
(iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub-section (1) of Section 90 of the Income Tax Act, 1961.
This clarification is regarding cases where after first DTAA witha country, a second DTAA is signed with a third country.
