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28 April 2021
Delhi High Court Rules Dividend Income Taxable at 5% under the India-Netherlands Tax Treaty applying the protocol to the Tax Treaty
 
To have parity in the tax treatments for the OECD member nations, the concept of Most Favoured Nation (MFN) is prevalent under the International tax laws. Typically, the MFN clause has an automatic application and forms an integral part of the Tax Treaties unless specified otherwise. However, we have often seen Indian Revenue Authorities denying the benefit of the MFN clause due to several reasons. Recently, the Delhi High Court (HC), in the case of Concentrix Services Netherlands B.V Vs ITO (TDS) and ANR1 and Optum Global Solutions International BV Vs DCIT and ANR2 has reiterated that the MFN clause benefit should be automatically available under the India-Netherlands Tax Treaty and a reduced rate of 5% on dividends can be applied.
 
We have summarized below the key facts and ruling of the Delhi Court and its impact on various other Tax Treaties.
 
Brief Facts:
  • Concentrix Services Netherlands B.V and Optum Global Solutions International BV (hereinafter referred to as ‘the companies’) applied for a Lower Deduction Certificate (LDC) with the jurisdictional tax officer to receive dividend payments from its Indian subsidiaries.
  • The India-Netherlands Tax Treaty provides for a 10% tax rate for dividends. The companies applied for a 5% rate in light of the MFN clause provided in the India-Netherlands Double Tax Treaty.
  • The Revenue Authorities denied the request and issued a lower deduction certificate for 10% withholding tax. Aggrieved by the order, the companies filed a writ petition before the Hon’ble Delhi HC.
 
Ruling:
 
After considering the arguments from both parties, the Delhi HC ruled in favor of the appellants and made the following observations:
  • The Delhi HC affirmed the view expressed by the division bench of the same court in the case of Steria (India) Ltd3 that protocol forms an integral part of the Tax Treaty and that the Government requires no separate notification.
  • The protocol incorporates the principle of parity between the India-Netherlands Tax Treaty and the conventions executed thereafter between India and any OECD member nations. Accordingly, if India agrees to a lower or restricted rate or scope with a third country, which is an OECD member, such a lower rate can be applied to the India-Netherlands Tax Treaty. 
  • The Delhi HC also held that the third country (which is invoked to take benefit) should be an OECD member when a taxpayer intends to avail the benefit, irrespective of the fact whether such third country was an OECD member (or not) at the time of signing the Tax Treaty.  
  • Furthermore, the Delhi HC relied on the Supreme Court’s judgment in the case of Union of India and Anr. vs. Azadi Bachao Andolan and Another, (2004) 10 SCC 1, to hold that while interpreting international treaties including Tax Treaties, the rules of interpretation that apply to domestic or municipal law need not be applied, as the international treaties, conventions and tax treaties are negotiated by diplomats and not necessarily by men instructed in the law. Therefore, their interpretation is liberated from the technical rules which govern the interpretation of domestic/municipal law. 
 
1. W.P.(C) 9051/2020
2. W.P.(C) 882/2021, CM Appl. 2302/2021
3. [2016] 386 ITR 390 (Delhi).
Our Comments
  • This a welcome decision for shareholders based in the Netherlands as it helps them availing a beneficial tax rate of 5% on dividends received from Indian companies.
  • It would be important to note this decision may also help several shareholders as many other Tax Treaties of India also have similar language. The Tax Treaty of India with Sweden, France, Hungary, etc., has a language similar to India-Netherlands, and shareholders from such countries would be able to avail a beneficial rate of 5%.
  • However, it would be interesting to see if the benefit can be extended to treaties where the language of MFN is not in line with the India-Netherlands Tax Treaty, e.g., the Switzerland Tax Treaty. The relevant extract of both the treaties is  provided below for reference:
India – Netherlands Tax 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 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.”

India-Switzerland Tax Treaty
“In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services), if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD signed after the signature of this Amending Protocol, India limits its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower than the rate provided for in this Agreement on the said items of income, the same rate as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply between both Contracting States under this Agreement as from the date on which such Convention, Agreement or Protocol enters into force.”
 
As it can be observed from the above, the language in the India-Switzerland Tax Treaty emphasizes that the OECD member is signing an agreement with India, which may mean that the third country has to be an OECD member at the time of signing the Tax Treaty and it does not matter if its a member on the date of claiming the benefit.
 
However, it would be interesting to see if it can be argued that the principle laid down by the Delhi HC in relation to ‘Common interpretation’ and liberal reading of tax treaties should be extended to such Tax Treaties as well or the same could be far fetched.
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