2021 (4) TMI 1051 - HC - Income Tax

Withholding rate of tax in respect of dividend - DTAA with the Kingdom of Netherlands - rejection of the request of the deductees made to respondent no. 1 that the rate of withholding tax should be pegged at 5% and not 10% (as indicated in the impugned certificates) in consonance with Clause (IV) of the protocol appended to the subject DTAA - HELD THAT - Clearly, the Netherlands has interpreted Clause IV (2) of the protocol appended to the subject DTAA in a manner, indicated hereinabove by us, which is, that the lower rate of tax set forth in the India-Slovenia Convention/DTAA will be applicable on the date when Slovenia became a member of the OECD, i.e., from 21.08.2010, although, the Convention/DTAA between India and Slovenia came into force on 17.02.2005. Therefore, participation dividend paid by companies resident in the Netherlands to a body resident in India will bear a lower withholding tax rate of 5 per cent. The other contracting State, i.e., the Netherlands has interpreted Clause IV (2) in a particular way and therefore in our opinion, in the fitness of things, the principle of common interpretation should apply on all fours to ensure consistency and equal allocation of tax claims between the contracting States. We are not impressed with the argument advanced on behalf of the revenue that since Slovenia, Lithuania, and Columbia became members of the OECD, not only after the subject DTAA came into force but also after their own DTAA came into force, and therefore, lower rate of withholding tax, i.e., 5% on dividends would not apply to recipients in the Netherlands, who are otherwise covered under the subject DTAA - as that is not how the other contracting State, i.e., the Netherlands has interpreted Clause IV (2) of the protocol appended to the subject DTAA. While interpreting international treaties including Tax treaties the rules of interpretation that apply to domestic or municipal law need not be applied, for the reason, that 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. The core function of a DTAA should be seen to aid commercial relations and equitable distribution of tax revenues in respect of income which falls for taxation in both the deductor and the deductee States, i.e., the contracting States. Conclusion Having regard to the foregoing discussion, we are of the view that the impugned certificates dated 16.09.2020 and 04.01.2021 deserve to be quashed. Respondent no. 1 will issue a fresh certificate under Section 197 of the Act, which would indicate, that the rate of withholding tax, in the facts and circumstances of these cases, would be 5%.

Summary

Issues Involved:
1. Withholding rate of tax on dividends under the DTAA between India and the Netherlands.
2. Interpretation of the Most Favoured Nation (MFN) clause in the protocol appended to the DTAA.
3. Applicability of lower withholding tax rates from DTAAs with other OECD member countries.

Detailed Analysis:

Issue 1: Withholding Rate of Tax on Dividends
Background: The petitioners, Concentrix Netherlands and Optum Netherlands, sought a lower withholding tax rate of 5% on dividends under the DTAA between India and the Netherlands, invoking the MFN clause. Respondent no. 1 issued certificates stipulating a 10% withholding tax rate.

Judgment: Article 10 (2) of the DTAA specifies that dividends can be taxed in India but should not exceed 10% if the recipient is the beneficial owner. The court noted that the recipients (Concentrix Netherlands and Optum Netherlands) are indeed beneficial owners. Therefore, the core issue was whether the MFN clause could reduce this rate to 5%.

Issue 2: Interpretation of the MFN Clause
Arguments by Petitioners: The petitioners argued that the MFN clause in the protocol should allow them to benefit from lower withholding tax rates provided in DTAAs with other OECD member countries without needing a separate notification.

Arguments by Revenue: The revenue contended that the MFN clause applies only if the third state was an OECD member at the time of the DTAA's execution. They argued that Slovenia, Lithuania, and Columbia were not OECD members when their DTAAs with India were executed, thus the lower rates should not apply.

Judgment: The court emphasized that the protocol forms an integral part of the DTAA, and no separate notification is required. The MFN clause is self-operational and applies as soon as a third state becomes an OECD member and has a lower withholding tax rate in its DTAA with India. The court cited the interpretation by the Netherlands, which applied the lower rate retroactively from the date the third state became an OECD member.

Issue 3: Applicability of Lower Withholding Tax Rates from DTAAs with Other OECD Member Countries
Arguments by Petitioners: The petitioners cited DTAAs with Slovenia, Lithuania, and Columbia, which offer a 5% withholding tax rate on dividends. They argued that the MFN clause should automatically extend these benefits to the DTAA with the Netherlands.

Arguments by Revenue: The revenue argued that since these countries were not OECD members when their DTAAs with India were executed, the MFN clause does not apply. They also argued that a separate notification would be required to extend these benefits.

Judgment: The court rejected the revenue's arguments, stating that the MFN clause applies once the third state becomes an OECD member, regardless of when the DTAA was executed. The court highlighted the principle of "Common Interpretation," ensuring consistency in the interpretation of DTAAs by contracting states. The court noted that the Netherlands' interpretation of the MFN clause supports the petitioners' view.

Conclusion:
The court quashed the impugned certificates dated 16.09.2020 and 04.01.2021, directing respondent no. 1 to issue fresh certificates under Section 197 of the Income Tax Act, 1961, indicating a withholding tax rate of 5% on dividends. The judgment emphasized the self-operational nature of the MFN clause in the protocol and the importance of consistent interpretation of DTAAs by contracting states.