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Supreme Court rejects lower tax on dividend under treaties
PrintIn a big win for revenue authorities, the Supreme Court has held that the provisions of the 'Most Favoured Nation' clause in a tax treaty are not triggered automatically and a separate notification is required. The SC's order is likely to result in re-opening of several high-value cases, and government officials estimate that the tax demands that follow could run into thousands of crores of rupees.
The SC was hearing a batch of appeals arising from decisions of the Delhi HC involving interpretation of the MFN clause contained in various Indian treaties with countries that are OECD members. For instance: Netherlands entities that had relied on the MFN clause, resulting in lower withholding of tax in India against their dividend income, will be adversely impacted, as will the Indian subsidiaries that paid the dividend at a lower rate.
The SC set aside the Delhi HC's order issued on April 22, 2021 in the case of Concentrix Services. Under the India-Netherlands tax treaty, the withholding rate in India for dividend income was 10%. The Delhi HC had held that as India had agreed on a 5% withholding tax rate in its subsequent tax treaties (with Slovenia, Lithuania, and Colombia), the lower rate would apply equally apply to India-Netherlands tax treaty.
Tax treaties entered into by India, with several OECD-member countries such as the Netherlands, France, Switzerland and Sweden, contain the MFN clause. This clause provides for a lower rate of withholding tax on dividend, interest, royalties or fees for technical services (FTS), if a lower rate is prescribed in a tax treaty that India enters into subsequently with another OECD-member country.
The Delhi HC had taken a similar view in the case of Nestle. The crux of the high court's order was that the MFN clause is an integral part of the tax treaty and is triggered automatically. However, the SC has held that a notification under section 90(1) of the Income-Tax Act is necessary and mandatory to give effect to a tax treaty or protocol, which alerts the existing provisions of law.
The SC was hearing a batch of appeals arising from decisions of the Delhi HC involving interpretation of the MFN clause contained in various Indian treaties with countries that are OECD members. For instance: Netherlands entities that had relied on the MFN clause, resulting in lower withholding of tax in India against their dividend income, will be adversely impacted, as will the Indian subsidiaries that paid the dividend at a lower rate.
The SC set aside the Delhi HC's order issued on April 22, 2021 in the case of Concentrix Services. Under the India-Netherlands tax treaty, the withholding rate in India for dividend income was 10%. The Delhi HC had held that as India had agreed on a 5% withholding tax rate in its subsequent tax treaties (with Slovenia, Lithuania, and Colombia), the lower rate would apply equally apply to India-Netherlands tax treaty.
Tax treaties entered into by India, with several OECD-member countries such as the Netherlands, France, Switzerland and Sweden, contain the MFN clause. This clause provides for a lower rate of withholding tax on dividend, interest, royalties or fees for technical services (FTS), if a lower rate is prescribed in a tax treaty that India enters into subsequently with another OECD-member country.
The Delhi HC had taken a similar view in the case of Nestle. The crux of the high court's order was that the MFN clause is an integral part of the tax treaty and is triggered automatically. However, the SC has held that a notification under section 90(1) of the Income-Tax Act is necessary and mandatory to give effect to a tax treaty or protocol, which alerts the existing provisions of law.
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