Libertatem Magazine

DTAA Provisions With Netherlands to Apply Without Fresh Notification: Delhi High Court

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The Petitioner filed a writ petition regarding the withholding rate of tax at 10%, in respect of Dividend and the certificates issued by the Respondent.

Facts of the Case

India entered into the subject DTAA with the Netherlands on 21.01.1989 which was notified on 27.03.1989. Concentrix Netherlands and Optum Netherlands hold 99.99% share in their Indian counterparts i.e. Concentrix India and Optum India respectively. Concentrix Netherlands and Optum Netherlands had applied under Section 197 of the Income Tax Act, 1961 to issue a certificate to authorize Concentrix India and Optum India to deduct withholding tax at a lower rate of 5%. The validity period of the certificates ended on 31.03.2021.

However, the Respondents issued those certificates with a withholding tax rate indicating 10%. The Petitioner in response to the above, filed the petition before the High Court Of Delhi.

Arguments presented before the Court

The counsel for the Petitioners submitted that since India has entered into DTAAs being the Most Favoured Nation, so a lower rate of withholding tax would apply. The counsel further put reliance on Article 10 (2) read with Clause IV Ad Articles 10, 11, and 12 contained in the protocol appended to the subject DTAA.

The counsel for the Respondents argued that that there was no separate notification issued, which entailed importing the benefit of the MFN Clause from DTAAs was misconceived. The protocol contained in the DTAA other than the subject DTAA will apply automatically if the deductee holds more than 10% of the share capital of the deductor. In this case, the deductees own nearly 99.99% share capital of the deductee.

Observation of the court

The counsel for Respondents submitted that the perusal of Clause (1) and (2) of Article 10 of the subject DTAA would show that dividends paid by a company that is a resident of one of the contracting States may be taxed in that other State. Countries like Slovenia, Lithuania, and Columbia became members of the OECD after the subject DTAA came into force thus 5% on dividends would not apply to recipients in the Netherlands.

The dividends can be taxed in India but the tax charged shall not exceed 10% of the gross amount of the dividend. Thus, no separate notification is required for the applicability of provisions.

In Corocraft Ltd., Lord Denning took a very broad principle for the applicability of the common interpretation principle in the context of foreign decisions.

While interpreting the provisions it is important to keep in mind that the provisions of an international treaty are that treaties are negotiated and entered into at a political level and have several considerations as their bases.

Court’s Decision

The Court ordered to quash the certificates dated 16.09.2020 and 04.01.2021. The Court further observed Respondent no. 1 to issue a fresh certificate under Section 197 of the Act with the rate of withholding tax of 5%.

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