Facts of the Case

The petitioner, Cotecna Inspection SA, filed the writ petition challenging the certificate dated 2 November 2021 and subsequent communication dated 26 November 2021 issued by the Income Tax Department under Section 197 of the Income Tax Act, 1961. The petitioner sought issuance of a fresh certificate prescribing a withholding tax rate of 5% on dividend income amounting to Rs. 21,05,26,160/- for Financial Year 2021–22.

The dispute arose because the tax authorities prescribed a withholding tax rate of 10% instead of 5%, despite the petitioner’s claim under the India–Switzerland Double Taxation Avoidance Agreement (DTAA) read with the Most Favoured Nation (MFN) Clause.

Issues Involved

  1. Whether the petitioner was entitled to the benefit of a 5% withholding tax rate on dividend income under the India–Switzerland DTAA by invoking the MFN clause.
  2. Whether a separate government notification was required for applying the MFN clause under the protocol to the DTAA.
  3. Whether the Revenue Department could refuse to follow binding judgments of the jurisdictional High Court merely because it intended to challenge them before the Supreme Court.

Petitioner’s Arguments

  • The petitioner contended that the protocol to the India–Switzerland DTAA incorporates the MFN clause, under which if India enters into a DTAA with another OECD member country granting a lower withholding tax rate, the same lower rate should automatically apply to Switzerland.
  • It was argued that India’s DTAAs with Slovenia, Lithuania, and Colombia provide for a lower 5% tax rate on dividends, and therefore, the same rate must extend to Switzerland.
  • Reliance was placed on earlier Delhi High Court rulings in:
    • Concentrix Services Netherlands B.V. v. ITO (TDS)
    • Nestle SA v. Assessing Officer, Circle (International Taxation)
  • It was argued that the tax department could not disregard settled law merely because it proposed to file appeals.Respondent’s Arguments
  • The Revenue contended that the petitioner could not claim the lower 5% tax rate because no notification had been issued by the Government of India extending the benefit of the DTAAs with Colombia, Lithuania, or Slovenia to Switzerland.
  • It was further submitted that the earlier Delhi High Court judgments in Concentrix and Nestle had not been accepted by the Revenue and Special Leave Petitions were proposed before the Supreme Court.

Court Order / Findings

The Delhi High Court held that:

  • The controversy was no longer res integra, as it was already settled in the judgments of Concentrix Services Netherlands B.V. and Nestle SA.
  • The protocol to the India–Switzerland DTAA forms an integral part of the treaty, and therefore, no separate notification is required for operationalising the MFN clause.
  • The tax department is bound by the judgments of the jurisdictional High Court and cannot refuse compliance merely because an appeal is contemplated.

Accordingly, the Court set aside the impugned order and certificate and directed the Revenue to issue a fresh certificate under Section 197 specifying the withholding tax rate at 5% on dividend income payable to the petitioner.

Important Clarification

This judgment reinforces that:

  • Protocols to DTAAs are enforceable as part of the treaty itself.
  • The MFN clause can automatically extend treaty benefits where India has granted better tax treatment to another OECD country.
  • Tax authorities are bound to follow jurisdictional High Court precedents until overturned by a superior court.

Sections Involved

  • Section 197, Income Tax Act, 1961 – Certificate for deduction at lower rate or no deduction
  • India–Switzerland DTAA
  • MFN Clause under DTAA Protocol
  • Article relating to Dividend Taxation under DTAA 

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:4280-DB/MMH20122021CW146022021_214634.pdf

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