This Tax Alert summarizes a decision of the Delhi High Court (HC), dated 22 April 2021, in the case of Concentrix Services Netherlands B.V. and Optum Global Solutions International B.V. (collectively called as Taxpayers) on the issue of rate of withholding tax applicable on the dividend income received from Indian subsidiaries as per India-Netherlands (I-NL) Double Taxation Avoidance Agreement (DTAA).
The Taxpayers, Netherlands residents, applied for lower withholding certificate under the Indian Tax Law (ITL) seeking a 5% withholding tax rate on dividends payable by their Indian subsidiaries by virtue of Most-Favored-Nation (MFN) clause read with DTAAs entered into by India with Slovenia, Lithuania and Columbia which provide for a beneficial withholding rate of 5%. The tax authority issued withholding certificate at the rate of 10% on the basis that I-NL DTAA provide for 10% source-taxation and MFN clause is not triggered as Slovenia, Lithuania, and Columbia were not Organisation for Economic Co-operation and Development (OECD) member countries when I-NL DTAA was executed whilst these countries became members of OECD only on a later date.
By applying the principles of parity, the HC granted the benefit of 5% withholding tax rate on dividend income by virtue of MFN clause of I-NL DTAA and directed that the withholding certificates providing for 10% rate should be quashed and a fresh certificate indicating lower rate of 5% should be issued. The HC observed that MFN clause which is a part of the protocol to I-NL DTAA is an integral part of I-NL DTAA and no separate notification is required to apply MFN provisions of I-NL DTAA. Further, the use of the word “is” in the sentence “which is a member of the OECD” in MFN clause requires countries to be OECD members when source taxation is triggered in India and not at the time when the subject DTAA (I-NL DTAA) was executed. The HC also noted that clarification issued by Netherlands provides benefit of 5% rate pursuant to India-Slovenia DTAA. For efficient and fair application of I-NL DTAA, the HC held that common interpretation should be applied to ensure consistency and equal allocation of tax claims between the contracting states as the rules of interpretation that apply to domestic or municipal law need not be applied, as DTAAs are negotiated by diplomats and not necessarily by men instructed in the law.
