LOWER WITHHOLDING TAX RATE ON DIVIDENDS AVAILABLE PURSUANT TO MFN CLAUSE IN CASE OF INDIA – NETHERLANDS DTAA

Facts of the case

  • In a recent case the Hon’ble High Court of Delhi held that 5% withholding tax rate on dividend shall be available under India – Netherlands Double Taxtation Avoidance Agreement (India – NL DTAA) by virtue of Most Favoured Nation clause (MFN) read with the DTAAs entered into by India with Slovenia, Lithuania and Columbia
  • In the facts of the case, the Assessees i.e. Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V. applied for a lower withholding tax deduction certificate under Section 197 of the Income Tax Act, 1961 (Act)
  • The taxpayer applied for 5% withholding tax rate on the basis that India – NL DTAA has to be read along with the MFN clause which is a part of the protocol therein.  Such MFN clause makes the tax payer eligible to claim lower withholding tax rate of 5% instead of 10% on payment of dividends
  • It is to be noted that India – NL DTAA otherwise provides for a rate of 10% withholding tax on payments of dividend, however, the presence of MFN clause provides the Assessee an option of lower withholding tax rate where any OECD member country with which India has entered into Double Taxation Avoidance Agreement has such lower tax rate in its treaty
  • Accordingly, in this case the Assessee took reference of tax treaties signed with Slovenia, Lithuania and Columbia, all being the OECD member countries and provide 5 % withholding tax rate on payments in nature of dividend, thus, the same shall apply in case of India – NL DTAA also

Revenue’s Contention:

  •  Against this, the Revenue contended that MFN clause shall not be available to the Assessee, since these countries at the time of signing of the DTAA between India – NL, these countries were not the member of OECD
  • Revenue also contended that since, at the time of signing of DTAA with  Slovenia, Lithuania and Columbia, these countries were not the OECD member countries, therefore, the protocol of India – NL DTAA will have no applicability

High Court Decision

  • Taking into consideration, the contention of the Assessee and Revenue, the High Court held that MFN clause which is a part of the protocol to India -NL DTAA is an integral part of it and does not require any separate notification
  • The protocol uses the word ‘is’ i.e. which is a member of the OECD and it cannot be interpreted to mean that such country should be member country at the time of signing of the DTAA.  It should be interpreted to mean that the country should be member country at the time when taxation is triggered in India
  • Further, the High Court held that common interpretation and consistency should be applied while interpreting the provisions of DTAA and since the DTAAs are negotiated by the diplomats and not by the men instructed by law, hence, the interpretation should be liberated from technical rules which otherwise govern the domestic/ municipal law
  • Therefore, basis above the High Court granted the beneficial rate of 5% withholding tax on payment of dividend in case of India – NL DTAA

Our view:

  • Time and again courts have held that MFN clause enshrined in the protocol of DTAA should be read as part of DTAA itself.  The benefit conferred under the protocol is suo-moto available to the taxpayer and there is no requirement for a separate notification to give effect to it.  Further, in case of DTAA, the interpretation of provisions should be liberal and not technical
  • Such decision of the High Court will help in providing guidance in the interpretation of other treaties having MFN clause i.e. France, Spain etc

Source: Concentrix Services Netherlands B.V. v. Income Tax Officer (TDS) , Delhi, High Court. W.P(c)9051/2020