Facts of the Case

  • Petitioners (Netherlands-based companies) held 99.99% shareholding in Indian subsidiaries.
  • They applied under Section 197 of the Income Tax Act seeking a lower withholding tax certificate at 5%.
  • The tax authorities issued certificates prescribing 10% withholding tax on dividends.
  • Petitioners relied on the MFN clause in the DTAA protocol, arguing that India’s treaties with OECD countries (Slovenia, Lithuania, Colombia) provided a lower rate of 5%.
  • Aggrieved, the petitioners approached the Delhi High Court challenging the certificates.

Issues Involved

  1. Whether the MFN clause in the India–Netherlands DTAA protocol automatically applies to reduce withholding tax on dividends to 5%.
  2. Whether a separate notification is required to invoke MFN benefits.
  3. Whether OECD membership must exist at the time of signing the DTAA or at the time of claim.
  4. Whether the withholding tax rate should be 5% or 10%.

Petitioner’s Arguments

  • The MFN clause forms an integral part of the DTAA and is self-operational.
  • India’s DTAAs with OECD countries (Slovenia, Lithuania, Colombia) provide a lower rate of 5%, which should automatically extend.
  • No separate notification is required for applying MFN benefits.
  • Reliance placed on precedents such as:
    • Steria (India) Ltd. v. CIT
    • Apollo Tyres Ltd. v. CIT
  • Petitioners being beneficial owners and majority shareholders qualify for reduced rate.

Respondent’s Arguments

  • MFN benefit applies only if the third country was an OECD member at the time of DTAA execution.
  • Slovenia, Lithuania, and Colombia were not OECD members at relevant times, hence MFN clause is inapplicable.
  • A separate notification is mandatory to import benefits.
  • MFN clause is conditional and not automatic.
  • The applicable withholding tax remains 10% under Article 10(2) of DTAA.

Court’s Findings / Analysis

  • The protocol is an integral part of the DTAA and does not require separate notification.
  • The MFN clause is self-operational.
  • OECD membership should be examined at the time of claiming benefit, not necessarily at the time of treaty execution.
  • Interpretation must follow “common interpretation principle” to maintain consistency between contracting states.
  • The Netherlands’ interpretation supports retrospective application of lower rate once OECD membership is achieved.
  • The Court rejected the Revenue’s restrictive interpretation as contrary to treaty intent.

Court Order / Final Decision

  • The impugned certificates prescribing 10% withholding tax were quashed.
  • The Court directed issuance of fresh certificates under Section 197.
  • The applicable withholding tax rate on dividends was held to be 5%.

Important Clarifications

  • MFN clause in DTAA protocols can be automatically triggered.
  • No separate notification is required for MFN benefit.
  • OECD membership need not exist at the time of DTAA signing.
  • Treaty interpretation must follow international principles, not strict domestic law rules.
  • Ensures equitable allocation of tax between contracting states.

Sections Involved

  • Section 197, Income Tax Act, 1961
  • Section 90, Income Tax Act, 1961
  • Article 10 (Dividends), India–Netherlands DTAA
  • Protocol Clause IV (2) – Most Favoured Nation (MFN) Clause
  • OECD Membership Interpretation

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:1421-DB/RAS22042021CW90512020_204446.pdf  

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