The Delhi high court recently comprising of a bench of Justice Rajiv Shakdher and Talwant Singh observed that the purpose of international treaties is to streamline commerce between two nations and authorities should avoid double taxation as far as possible as according to the provisions mentioned under the treaty dictating rules for equitable taxation. (Optum Global Solutions International BV Vs Deputy Commissioner of Income Tax & Anr.)
Facts of the Case
The petitioners are the deductees, i.e., the ultimate tax-payers. The grievance of the petitioners is that their request to respondent, for issuance of a certificate at a lower withholding tax rate of 5%, was rejected, despite The Government of the Republic of India and the Government of the Kingdom of Netherlands Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion [DTAA].
In the first writ petition, there was an assertion made by Concentrix Netherlands that it had also filed an application seeking reasons as to why a higher rate of TDS had been stipulated and that a response qua the same was received from respondent justifying its stance.
Contention of the Parties
Petitioners made the following submissions:
- Although the subject DTAA provides for a withholding tax rate of 10% on dividends received by an entity residing in the Netherlands from an entity residing in India, the petitioners sought a lower rate withholding tax certificate of 5% by placing reliance on the Most Favoured Nation [in short “MFN”] Clause obtaining in the protocol appended to the subject DTAA. In this context, reliance was placed on Article 10 (2) read with Clause IV.Ad Articles 10, 11 and 12 contained in the protocol appended to the subject DTAA. In particular, reliance was placed on Clause IV (2) of the protocol.
- Based on the said provisions of the subject DTAA and the protocol, it was contended that since India had entered into DTAAs with other countries which were members of Organization for Economic Cooperation and Development [in short “OECD”], the lower rate or the restricted scope in the DTAA executed between India and such a country would automatically apply to the subject DTAA. This argument was based on the provision made in the preface of the protocol which inter alia stated that the protocol “shall form part an integral part of the Convention” i.e., the subject DTAA.
- For applicability of the provisions of the DTAA which followed the subject DTAA, contrary to the stand of the respondents, no fresh notification was required. In support of this plea, reliance was placed on the judgement of Division Bench of this Court in Steria (India) Ltd. vs. Commissioner of Income-tax-VI, [2016] 386 ITR 390 (Delhi) and the judgement of the Karnataka High Court in Apollo Tyres Ltd. vs. Commissioner of Income Tax, International Taxation, [2018] 92 taxmann.com 166 (Karnataka).
- The reasons advanced on behalf of the respondents, in defence of the impugned certificates, issued under Section 197 of the Act, that there was no separate notification issued, which entailed importing the benefit of the MFN Clause from DTAAs executed with countries like Slovenia, Lithuania, and Columbia into the subject DTAA, was completely misconceived, given the provisions contained in the protocol appended to the subject DTAA. The protocol contained in the subject DTAA was configured, to self-trigger, upon the execution of a DTAA other than the subject DTAA, if it provided a lower rate of tax or a scope more restricted, as long as the deductee held more than 10% of the share capital of the deductor. In these cases, admittedly, the deductees own nearly 99.99% share capital of the deductee.
On the other hand, Mr. Anand and Mr. Sharma made the following:
- A bare reading of Clause IV (2) of the protocol appended to the subject DTAA would show that the benefit of the lower rate of withholding tax or a scope more restricted would be available only if the country with which India enters into a DTAA was a member of the OECD at the time of the execution of the subject DTAA. In other words, the benefit of the lower rate of withholding tax or a scope more restricted would extend to those governed by the subject DTAA if the DTAA(s) on which reliance is placed are entered into before the subject DTAA or with a country which was not a member of the OECD on the date when the subject DTAA was executed.
- In this context, our attention was drawn to the fact that the DTAA between India and Slovenia which provided for a withholding tax rate of 5% on dividends was executed on 17.02.2005. Slovenia, we were told, became a member of OECD in August 2010. Likewise, we were informed that the DTAA between India and Lithuania was executed on 10.07.2012 whereas Lithuania became a member of OECD only in July 2018. Insofar as Columbia was concerned, we were informed that the DTAA between India and Columbia was executed on 07.07.2014 whereas it became a member of OECD in April 2020. The argument was, since none of the aforementioned countries, i.e., Slovenia, Lithuania, and Columbia were members of the OECD, on the date when they executed DTAAs with India, Clause IV (2) of the protocol appended to the subject DTAA would have no applicability.
- It was contended, based on the aforesaid dates and events, that the benefit of the lower rate of withholding tax or a scope more restricted was extended to Slovenia, Lithuania and Columbia in their own right and not because they were members of the OECD.
- Furthermore, the submission made was that several amendments have been made to the subject DTAA which have been ratified by both India and the Netherlands and therefore, if the benefit of a lower rate of withholding tax or a scope more restricted as provided in the DTAA(s) executed between India and Slovenia, Lithuania and Colombia is to be extended to those governed by the subject DTAA it could only be done by amending the subject DTAA followed by the issuance of notification. Since no such amendment has been made to the subject DTAA, the withholding tax cannot be lower than 10%
Courts Observation & Judgment
The bench noted, “A perusal of Clause (1) and (2) of Article 10 of the subject DTAA would show that when dividends are paid by a company which is a resident of one of the contracting State, to a resident of other State, it may be taxed in that other State. However, such dividends can also be taxed in the contracting State of which the company paying dividends is a resident according to laws of that State, and if the recipient is the beneficial owner of the dividend, the tax so charged shall not exceed 10% of the gross amount of the dividend.
In the given facts and circumstances, although, the remitter of dividends are Indian entities, the recipients are companies residents of the Netherlands. Therefore, in consonance with Article 10 (2) of the subject DTAA, the remittance, i.e., the dividends can be taxed in India provided the recipients are beneficial owners of the dividends and the tax rate does not exceed 10% of the gross amount of dividends. The respondents have not contested the assertion that the recipients, i.e., Concentrix Netherlands and Optum Netherlands are the beneficial owners of the dividends. In fact, in consonance with a request made by them, certificates under Section 197 of the Act were issued authorizing the deductors, i.e., the remitters namely Concentrix India and Optum India to deduct withholding tax @ 10% in accordance with Article 10(2) of the subject DTAA.
The point of inflection is the 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.”
The court relied on the judgment of Union of India and Anr. vs. Azadi Bachao Andolan and Anr, (2004) 10 SCC 1 wherein it was held that the interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being ‘unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation and the words ‘are to be given their general meaning, general to lawyer and layman.
The court held that “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. It is ordered accordingly. 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%.”
The bench even noted, ”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.”
Read Judgment;
SOURCE ; latestlaws.com/
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