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October 21, 2023

SC not in favour of Giving concessions like lowering the taxes for dividend under treaties

SC not in favour of Giving concessions like lowering the taxes for dividend under treaties

 ‘Notification Is Needed For Lower Tax and Is Not Automatic For Those under the Clause of Most-Favoured Nations’

In 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 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.

SEVERAL CASES EXPECTED TO BE RE-OPENED

The withholding tax rate in India, on dividend paid by an Indian subsidiary to its Netherland parents is 10%. But, the India-Slovenia tax treaty, entered into subsequently prescribed a 5% rate. The Delhi HC held this lower rate would apply,As ‘most favoured nation’ clause would be triggered automatically. The SC held that a separate notification is required for application of the MFN clause. This will result in re-opening of many cases owing to shortfall of tax.  

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 in subsequent tax treaties (with Slovenia, Lithuania, and Colombia), the lower rate would apply to India-Netherlands tax treaty.

“The apex court’s order turns on its head the widely accepted view that any subsequent tax treaty signed with an OECD-member country, irrespective of when that country became a member, will automatically be read into all existing OECD-members”, Aeka Advisors partner Abhishek Goenka said.

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’s order will have very wide ramifications for MNCs, from all Countries with whom India has MFN clause and who have taken its benefit for their dividend, interest, royalty and FTS income,” Transaction Square founder Girish Vanvari said.

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