Rate of Withholding Tax on Dividends Paid to Non-residents

In the recent judgement of Hon’ble Delhi High Court, the assessee being M/s Nestle SA, was given relief of lower withholding tax rates on payment of dividend to a non-resident. The Hon’ble High Court relied on its earlier decision of Concentrix Services Netherlands B V vs. Income Tax Officer TDS & Anr, where in similar issue had come before it to decide. 

The Hon’ble High Court in that decision had held that the MFN clause is to be read as an integral part of the DTAA and does not require any separate notification. The interpretation of the DTAA should be liberal and not technical. Further, the country should be a member country on the date when the taxation is triggered for the non-resident to avail the MFN clause if that member countries DTAA agreement is more beneficial.  

With these judgments, the non-resident recipient has an option to avail the beneficial rate of lower withholding tax rate up to 5% which otherwise can be as high as 15% in some DTAAs.  Thus, the option of repatriating profits through dividends can be re-visited where the recipient entity is in the jurisdiction with which India has DTAA and it provides beneficial rate through MFN clause.  Having said that, it is yet to be seen, whether the department will challenge such payouts on beneficial ownership principles now?

Source:

  • Concentrix Services Netherlands B.V. v. Income Tax Officer (TDS), Delhi, High Court. W.P(c)9051/2020
  • M/S Nestle SA v. Assessing Officer Circle (International Taxation)-2(2)(2), New Delhi, Delhi, High Court. W.P.(C) 3243/2021

-Shireen Dua, Executive-Direct Taxation, SW