Facts of the Case

The Petitioner, Galderma Pharma SA, a Swiss entity, challenged a certificate dated 18 November 2021 issued by the Respondent (Income Tax Officer), directing deduction of tax at source (TDS) at 10% on dividend income payable by its Indian affiliate.

The Petitioner sought application of a reduced withholding tax rate of 5%, relying on the Most Favoured Nation (MFN) clause in the Protocol to the India–Switzerland DTAA. The Petitioner argued that since India had granted a lower rate to other OECD member countries (e.g., Colombia), the same benefit should extend automatically.

However, the Revenue rejected the request under Section 197, stating that no separate notification had been issued by the Government of India for applying such benefit.

Issues Involved

  1. Whether the MFN clause in the Protocol to the India–Switzerland DTAA allows automatic application of a lower withholding tax rate (5%) without separate notification.
  2. Whether the Revenue can deny benefits under DTAA Protocol despite binding judicial precedents.
  3. Whether the certificate issued under Section 197 rejecting lower withholding rate is legally sustainable.

Petitioner’s Arguments

  • The MFN clause in the Protocol forms an integral part of the DTAA and automatically applies.
  • India granted a lower dividend tax rate (5%) in DTAAs with other OECD countries (e.g., Colombia), hence the same benefit must extend to Switzerland.
  • No separate notification is required for applying the MFN clause.
  • Reliance placed on precedents:
    • Steria (India) Ltd. v. CIT
    • Concentrix Services Netherlands B.V. v. ITO
    • Apollo Tyres Ltd. v. CIT

Respondent’s Arguments

  • The Petitioner is not entitled to the 5% rate as no formal notification has been issued by the Government of India.
  • The Revenue has not accepted earlier Delhi High Court rulings and is in the process of filing appeals before the Supreme Court.
  • Therefore, the benefit of MFN clause cannot be granted automatically.

Court’s Findings / Order

  • The Court held that the issue is no longer res integra and is already settled by binding precedents, including:
    • Concentrix Services Netherlands B.V. v. ITO
    • Nestle SA v. Assessing Officer
  • It was reaffirmed that:
    • The Protocol is an integral part of the DTAA.
    • No separate notification is required for applying MFN clause benefits.
  • The Court also relied on:
    • Union of India v. Kamlakshi Finance Corporation Ltd.
      holding that binding judicial precedents must be followed by authorities.

Final Order

  • The impugned certificate and order were set aside.
  • The Respondent was directed to issue a fresh certificate under Section 197 applying 5% withholding tax on dividends as per the DTAA.

Important Clarification

  • MFN clause benefits under DTAA apply automatically if conditions are met.
  • Tax authorities cannot refuse to follow binding High Court judgments merely because appeals are proposed.
  • Protocol provisions are legally enforceable without separate legislative action.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:4172-DB/MMH14122021CW142062021_180929.pdf

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