ITAT invokes MFN clause to give benefit of Article 12 of India-Italy treaty

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  • Last Updated on 27 January, 2023

MFN clause

Case Details: Koninklijke Philips N.V v. DCIT - [2023] 146 taxmann.com 213 (Kolkata-Trib.)

Judiciary and Counsel Details

    • Sonjoy Sarma, Judicial Member & Girish Agrawal, Accountant Member
    • Ketan Ved, CA, for the Appellant.
    • G.H. Sema, Addl. CIT for the Respondent.

Facts of the Case

Assessee-non-resident Company was incorporated as per the laws of the Netherlands. It was engaged in the areas of consumer electronics domestic appliances, components, and medical systems. The assessee filed its return of income for the year under which the refund was claimed

During the year, the Assessing Officer (AO) processed the return and granted a refund for the relevant year. However, he deducted tax from the interest component of the refund.
Aggrieved by the order, the assessee preferred an appeal to the CIT(A) but with no success.

The aggrieved assessee preferred an appeal to the Kolkata Tribunal.

ITAT Held

The Tribunal held that as per Protocol IV(2) of the India-Netherlands Treaty, the assessee is covered by the benefits of the Most Favoured Nation (MFN) clause. This protocol contains that if the provisions of a tax treaty between India and another OECD member country provide for measures that are more beneficial than with the Netherlands, the provisions of the treaty with such other country will apply to India-Netherlands Treaty.

As per the India-Italy treaty, interest earned by a resident of Italy will not be chargeable to tax if such interest is paid by the Government of India. India- Italy Treaty came into force in 1995 and Netherlands in 1989, i.e., after signing DTAA with the Netherlands.

Therefore, by virtue of the Protocol mentioned in the India-Netherlands treaty and the MFN clause, the provisions of the India-Italy treaty becomes available to the assessee as the India-Italy Treaty came into force after signing Treaty with the Netherlands.

In the instant case, interest on the income tax refund is a “debt claim” payable by the government to the assessee which is covered under article 12 of the India-Italy treaty. This interest is not chargeable to tax in India and thus no tax was required to be deducted.

Thus, the AO was directed to refund the tax deducted on the interest component of the Income tax refund

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